Let's see, the stock market rallied while economic data was weakening. Yet bonds were rallying at the same time, and yields have been plunging -- to near record-lows of 2.75% in the 10-year! This was a great dichotomy that had many people scratching their heads. Why would stocks rally and bond yields plunge while we got weakening economic data?

Well, if they were fueling up the helicopters, that would make sense.

Remember the bond market is often "smarter" than the stock market. The plunge in yields has been telling you something. Is it not interesting that the stock market and bond rally continued until the Fed announcement and then failed on yesterday's news? Sell the news, baby.

Federal Reserve Bank of St. Louis James Bullard was the guy to fire the warning shot, and he did it very clearly just a couple of weeks ago in a not-too-thinly-disguised trial balloon floated by the Fed. From the Wall Street Journal report on July 29 on Bullard's paper:

"Mr. Bullard said the 'appropriate tool' for tackling a deflation threat when interest rates are zero is to expand 'quantitative easing,' a policy of buying longer-dated debt, including government debt. The U.S. and the U.K. both applied variations of this policy amid the recent financial crisis, and Japan has tried to do the same at different times. In the past year and a half, the Fed bought roughly $1.7 trillion of government and mortgage debt."

So what do you think, should we have expected more Quantitative Easing (QE)? Yesterday's announcement was a baby step in that direction -- "QE Lite" as many people are referring to it. Instead of printing new money -- which is likely coming soon -- the Fed is going to try to use cash from its considerable mortgage-bond portfolio (many of these mortgage bonds, left in the portfolio, "run off" or mature and thus the proceeds can be reinvested somewhere else, if the Fed chooses not to reduce its balance sheet).

It's clear to me that what's been going on is that the market has been anticipating the Fed's new treasury-buying splurge, and yesterday's announcement is the first step.

Here's the problem: As Zero Hedge points out, taking the cash from the mortgage bonds running off only amounts to $340B. That's chicken-feed these days, barely enough for a down payment on the Fed's new money-printing 'copters. It pales in comparison to their past, multi-trillion-dollar spending sprees. It may not be enough to counteract a weak economy.

At any rate, a stock market that relies on increased money-printing and Fed benevolence is not a healthy market, anyway. A healthy market rallies on its own, without the help of Uncle Ben. A strong stock market would be rallying while treasuries sell off, in anticipation of a strengthening economy. That would be what you call a wall of worry. This is a wall of panic.

The bottom line is that the stock market rally appears to be failing at a crucial juncture, as I anticipated. The S&P 1100-1125 zone, and is forming a quite ugly rounded top. What is more ugly is that the selloffs are coming on higher volume and appear to be more vicious than the rallies.

There is, in fact, a wonderful symmetry developing in the chart, where you can now see it has topped three times in the 1125-1140 zone at overbought levels. That leaves a very ugly "head" (from a "head and shoulders") on the market top in April, which we know eneded badly. This chart does not inspire confidence.

And yes, many blue chip stocks are starting to look very cheap. That does not mean they can't get a lot cheaper. I continue to hold some dividend stocks, but I'm staying clear of any big positions in the market, and the remainder of what I hold is hedged. I continue to build on small shorts. I may go in more short later in the week if it looks like the market is breaking down.