While the 22.54% gain in the S&P 500 since May 8, 2009 is quite solid, the pace of the gains is clearly slowing as everyone tries to determine whether our economy is gaining enough momentum to support higher equity prices. The gains recently have been strong across our major indices, but only the Russell 2000 has posted gains in excess of 2.5% thus far this year. In fact, the Dow Jones is up just 1.32%. Part of the reason, in our opinion, is that market participants are taking a much different view of the market's prospects now than they did in 2009. That keeps our caution flag raised high.

The current state of the market leaves us in a position to trade stocks with a very short-term mindset. Many technicals suggest this rally has legs, while the longer-term technical picture is quite different. Those nasty negative divergences apparent on long-term weekly charts are indicating that significant consolidation/weakness is just around the corner, if it hasn't already started. What does this mean to the everyday trader? Don't chase sector rallies. Instead, focus on strong stocks within sectors that are lagging temporarily but are near price or relative support. Timing of entry and exit will be more critical than ever.