Are Markets Overbought and About to Pull Back?

The Dow barely edged higher and S&P 500 ended lower on Wednesday, with chatter growing that the stock market’s five-month rally was growing long in the tooth.

Both major indexes are currently hovering near key levels; 12,000 in the Dow and 1,300 in the S&P.

Meanwhile, chart watchers say the S&P 500 has started to look overbought by some technical measures.

On CNBC’s Fast Money BofA Merrill strategist Mary Ann Bartels tells us she’s concerned about the negative divergence between the S&P 500 and the Dow against the Dow Transports. (According to Dow Theory they should be moving in tandem.) "We're getting a breakout in the Dow and S&P but we're not getting a confirmed breakout in the Transports. In fact Wednesday was a pretty rough day for the Transports." She thinks it’s a sign of trouble – that markets are overbought.

Joseph Hargett, a strategist at Schaeffer's Investment Research, says the Dow needs to stay above 12,000 firmly as a show of short-term support. "The resistance now resides in the 12,100-12,200 area."

In a live interview, Mary Ann Bartels reveals that she’s looking for a correction – a pullback somewhere between 4-10%. And she expects it will last 4-6 weeks.

She’s not alone.

Other market mavens are watching the PHLX Semiconductor Index which is struggling at the 450 level. Chips are considered a leading indicator for the broader market.

"If the market looks like it's ready for a 5 percent or more correction, what's one of the sectors at the top of my list to be out of? For sure it's the semiconductors," says Vinny Catalano, chief investment strategist at Blue Marble Research in a Reuters interview.

How should you position?

Although the commentary would make want to run for the exits, Mary Ann Bartels says no need. She thinks at the worst we’ll see is a sell-off down to 1200 in the S&P. In fact she thinks pullbacks should be bought.

”We’re in the third year of a presidential cycle and that’s typically the best year with the market historically up 14%,” she says. “The S&P can still hit 1400 – use the pullback top get back into the market.”

But what if some black swan event, like unrest spreading across the Arab world, sends stocks tumbling? Bartells says her line in the sand is line 1170. Not until the S&P breaks that level, would she change her broader bullish outlook.

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OIL TAKES A PAUSE

The price of oil took a small breather on Wednesday after its surge earlier this week, however the the oil service stocks continued to surge, with the OIH hitting fresh 52 week highs.

How should you trade it?

In this space I like a slew of names, says Joe Terranova including FrontierCVR Energy , Cenovus Energy , Canadian Natural Resources and Diamond Offshore.

Canadian Oil Sands is my favorite name in the space, says Karen Finerman. There’s no political unrest in Canada.

I’m skeptical of the oil bull, says Steve Cortes. Ford and other auto stocks are trading disastrously. I see weakness in the auto space as bad news for crude.

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SOLAR STOCKS

Looking at a derivative play off higher oil prices, solar stocks climbed on Wednesday after silicon maker MEMC Electronic Materials came out with a strong earnings forecast and Goldman Sachs recommended First Solar as its top clean energy play.

What’s the trade?

Yingli is may favorite name in this space, says Brian Kelly.

American Superconductor is also worth a look, says Stephen Weiss. It’s primarily a play on wind power.

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TAKE YOUR POSITION: VERIZON iPHONE

The much anticipated Verizon iPhone will be available in stores February 10th, with limited online sales available Thursday at 3am but shares of iPhone maker Apple did not move on the news.

How should you trade, now?

I’m long Apple, says Karen Finerman and plan to remain long Apple.

I’d look at Qualcomm, says Brian Kelly.

I think Verizon is the way to play all the new phones, says Stephen Weiss. The stock offers phenomenal yield and their quarter was great.

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Trader disclosure: On Feb. 2, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Karen Finerman owns (MSFT), (JPM), (HPQ), (GOOG), (C), (BP), (AAPL) and (BAC). Joe Terranova owns (VRTS), (C), (UPL), (GM), (PEP), (MS), (LTD), (CVI), (CVE), (SU), (CPX), (CNQ) and (POT). Steve Cortes owns (SVU), (MO), (EXC) and U.S. Treasuries. Steve Cortes is short (BAC). Steve Cortes is short (LVS). Stephen Weiss owns (TBT), (AMSC), (QCOM), (MSFT), (HPQ), (SMCI), (PZN), (IPI), (AGU), (BTU), (MEE), (DVN), (COP), (HK), (EMC), (FWLT), (VZ), (FAS) and (JPM).

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BRIAN KELLY
Accounts Managed by Kanundrum Capital Own (BAC)
Accounts Managed by Kanundrum Capital Own (EBAY)
Accounts Managed by Kanundrum Capital Own (GLD)
Accounts Managed by Kanundrum Capital Own (IAU)
Accounts Managed by Kanundrum Capital Own (MCP)
Accounts Managed by Kanundrum Capital Own (MS)
Accounts Managed by Kanundrum Capital Own (YGE)
Accounts Managed by Kanundrum Capital Own (TLT)
Accounts Managed by Kanundrum Capital Own (DBA)
Accounts Managed by Kanundrum Capital Own (JJG)
Accounts Managed by Kanundrum Capital Are Long The Yen
Accounts Managed by Kanundrum Capital Own (GMCR) puts
Accounts Managed by Kanundrum Capital Own (JEF)
Accounts Managed by Kanundrum Capital Own (CME)

KAREN FINERMAN
Finerman's firm is short (MDY)
Finerman's firm is short (SPY)
Finerman's firm is short (IWM)
Finerman's firm is short (IJR)
Finerman's firm is long S&P puts
Finerman's firm is long Russell 2000 puts
Finerman's firm owns (AAPL)
Finerman's firm owns (BAC) leaps
Finerman's firm owns (BP)
Finerman's firm owns (HPQ)
Finerman's firm owns (IBM)
Finerman's firm owns (JPM) and (JPM) leaps
Finerman's firm owns (M)
Finerman's firm owns (MSFT)
Finerman's firm owns (PLCE) and (PLCE) calls
Finerman's firm owns (TGT)
Finerman's firm owns (WMT)

JOE TERRANOVA
Terranova is Chief Market Strategist of Virtus Investment Partners, LTD
Virtus Investment Partners Owns More Than 1% Of (ABAX)
Virtus Investment Partners Owns More Than 1% Of (AMKR)
Virtus Investment Partners Owns More Than 1% Of (CCG)
Virtus Investment Partners Owns More Than 1% Of (CASS)
Virtus Investment Partners Owns More Than 1% Of (CSVI)
Virtus Investment Partners Owns More Than 1% Of (EXR)
Virtus Investment Partners Owns More Than 1% Of (FCFS)
Virtus Investment Partners Owns More Than 1% Of (IGE)
Virtus Investment Partners Owns More Than 1% Of (KRC)
Virtus Investment Partners Owns More Than 1% Of (LDR)
Virtus Investment Partners Owns More Than 1% Of (LPHI)
Virtus Investment Partners Owns More Than 1% Of (NRCI)
Virtus Investment Partners Owns More Than 1% Of (DBV)
Virtus Investment Partners Owns More Than 1% Of (XLB)
Virtus Investment Partners Owns More Than 1% Of (XLV)
Virtus Investment Partners Owns More Than 1% Of (XLP)
Virtus Investment Partners Owns More Than 1% Of (XLY)
Virtus Investment Partners Owns More Than 1% Of (XLE)
Virtus Investment Partners Owns More Than 1% Of (XLF)
Virtus Investment Partners Owns More Than 1% Of (XLI)
Virtus Investment Partners Owns More Than 1% Of (XLK)
Virtus Investment Partners Owns More Than 1% Of (XLU)
Virtus Investment Partners Owns More Than 1% Of (SUBK)
Virtus Investment Partners Owns More Than 1% Of (WDFC)
Virtus Investment Partners Owns More Than 1% Of (YDNT)
Virtus Investment Partners Owns More Than 1% Of (DPUKF)

SIMON BAKER
Baker Ave owns (CRM)

ANTHONY SCARAMUCCI
Scaramucci and SkyBridge Capital Own (V)

MARY ANN BARTELS
No disclosures

DEBORAH WEINSWIG
An Employee Of Citigroup Global Markets Or Affiliates Is A Trustee Of (TGT)
Citigroup Global Markets Or Affiliates Has Managed Or Co-Managed An Offering Of (HD), (TGT), (WMT), (DG) In Past 12 Months
Citigroup Global Markets Or Affiliates Has Received Investment Banking Compensation In Past 12 Months From (HD), (KR), (SKS), (TGT), (WMT), (DG)
Citigroup Global Markets Or Affiliate Received Non-Investment-Banking Compensation In Past 12 Months From (JCP), (KSS), (M), (SWY), (SVU), (TGT), (WAG), (WMT), (COST)
(HD), (KR), (SKS), (TGT), (WMT) Are Or In Past 12 Months Were Investment Banking Clients Of Citigroup Global Markets
(CVS), (HD), (JCP), (KSS), (KR), (M), (SWY), (SKS), (SVU), (TGT), (WAG), (WMT), (COST), (DG) Are Or In Past 12 Months Were Non-Investment Banking Clients Of Citigroup Global Markets (Securities-Related Services)
(HD), (JCP), (KSS), (KR), (M), (SWY), (SVU), (TGT), (WAG), (WMT), (COST) Are Or In Past 12 Months Were Non-Investment Banking Clients Of Citigroup Global Markets (Non-Securities-Related Services)
Citigroup Global Markets Or Affiliates Owns 5% Or More Of (SKS)
Citigroup Global Markets is a market maker in (COST), (CVS), (M), (WINN)

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