A few weeks ago the VIX index was indicating elevated optimism among investors. As stocks steadily climbed, the AAII survey showed more bulls than bears. Last week, the stock markets weakness led to a reversal in that optimism.

Now that the optimism is wearing off, the Investors Intelligence survey is showing a decline in bulls for the first time in eight weeks. As the overbought condition continues to unwind, I believe a seasonally favorable period for stocks lies ahead for part of the summer.

This being said, I am not ruling out the remainder of the correction which could carry the S&P to its support level which lies at 1370.

In July, the Bush Administration said they would stop additional purchases for the Strategic Petroleum Reserves (SPR). This should help continue correcting the excesses in the price of oil.

Already, traders are taking profits in crude as prices have fallen from $135/bbl to its recent price of $123.05. Consumers are reaching a breaking point as gasoline prices have reached a
level that is causing consumers to begin yelling "uncle". Even GM got into the act yesterday when they announced they would close four American truck plants, and focus instead on producing smaller cars.

In addition to falling oil prices, other commodities have seen steep declines. Corn, which has risen as a result of the stupid ethanol mandate, has finally moved into a trading range, and stopped its assent. Corn has been one of the main culprits in the soaring price of food.

Other Agricultural commodities such as Oats and soybeans have fallen 10% from their highs, and wheat is down 40% since March.

These are all positive signs for inflation (in the short run), and could provide the necessary fuel for a strong rally this summer.

Last week, famed hedge fund manager, Doug Kass of Seabreeze Partners went long on bank stocks after being a full blown bear since 2005. Like the NASDAQ in 2000, the banks are now the most hated group on Wall Street. An alert contrarian knows what this means.

After the summer rally- and maybe into the election- I am concerned that the Feds new stance to fight inflation will continue to have a negative effect on housing as interest rates rise in 2009.

As the credit markets have stabilized in recent weeks, investors have been selling Treasuries driving yields higher across the board. The 2-year T-Note is now 2.75%, almost double what it was in March, and the 3-month T-Bill is around 2.00% after being as low as a half a percent.

This being said, I believe real estate has entered a 10 year bear market. While home prices will not continue to fall for 10 years, price appreciation as we know it has ceased. I don't believe we will see meaningful price appreciation again for 10 years.

Higher interest rates to fight inflation will set the stage for round two the the bear market that began in October 2007. False rallies- even very strong ones will eventually give way to a continuation of the bear market.

This being said, traders will make lots of money. Longer term investors will have their will and resolve tested several times