Bulls Fall from Their Perch: Victims of Oil, Financials and Overconfidence

"It wasn't those planes that killed Kong...It was beauty that killed the beast."

The rally from the mid-March lows came to a screeching halt this week amid surging oil prices and renewed concern about financials after pitiful results this week from Fannie Mae, AIG, Legg Mason and others.

Those hurt but what really killed the market's momentum was overconfidence.

Last weekend the market chatter was all about the stock market's "breakout," which appears to have peaked, at least for the near-term, when the S&P 500 hit 1422 intraday on May 2. Traders everywhere seemed to be getting bullish and even veteran market watcher Richard Russell was uncharacteristically upbeat in Barron's last weekend, fueling  talk of how "Dow Theory" was signaling a new bull phase. (Dow Theory is based on the relationship between the Dow Industrials and Transports, which are likely to be under additional pressure Monday after FedEx's warning late Friday.)

This week brought a lot of chatter from Wall Street titans, including Hank Paulson and Jamie Dimon, about the credit crisis being over, or in its final throes.

Too much optimism can be a dangerous thing because if everyone is bullish that probably means they've placed bets accordingly - and short sellers have already covered positions -- leaving the market more vulnerable to a decline.

On that note, kudos to Jeff Saut of Raymond James who warned about the "overbought" state of the market generally, and financials specifically, in an interview Monday on Tech Ticker.

Kudos as well to Helene Meisler, who correctly predicted more short-term upside but trouble in early May during her Tech Ticker appearance on April 21.

Meisler, a technician who writes TheStreet.com's Top Stocks newsletter, has been writing about other unconventional explanations for the market's recent moves. Specifically, the stock market's relationship to bond yields -- which fell significantly this week after hitting their highest levels since February on Monday -- and the yen's strength vs. the dollar.

It's too arcane to got into detail here, especially on a Friday. But think about it this way: Falling Treasury yields and a rising yen reflect traders unwinding bullish bets and dumping riskier assets, which is what stocks had become after the S&P's roughly 13% rally from its March 17 low to May 2 high inspired too much talk about "bottoms" and "breakouts."