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Since January 2011, I have repeatedly called for the S&P 500 (NYSEARCA:SPY) to rally to the 1,440 level, which is the 2008 May bounce-back highs off the March 2008 lows. For all intents and purposes, today's rally has us testing those levels. For the year, the S&P (SPY) is now up 13.8%.

Thus far, June 2012 - September 2012 has mirrored March 2008 - May 2008 almost exactly. The question for investors going forward is, do we repeat the 2008 pattern and fall dramatically from the 1,440 level, or do we push through to test the all-time highs near 1,570?

My answer is: BOTH

There is no question the market is toppy, having rallied nearly 14% in three months. However, rallies like the one we are currently experiencing are typically momentum driven, gaining speed the higher we climb. In this regard, we could conceivably rally another 5% - 10%, which would put us at a retest of the all-time highs. In two separate articles I wrote earlier this year I presented independent research that supported a 2012 rally to the previous all-time highs:

"With many of the clouds of uncertainty abating, and given the historical probabilities of significant positive returns following a flat market year, I feel confident we will retest the 2011 highs in 2012, and possibly the 2007 all-time highs in the S&P."

"Should the markets behave consistent with my historical analysis following positive first quarters, we should see continued upside in the S&P to 1,520 - 1,540, resulting in a 22% gain for 2012."

Unfortunately, in a number of Instablog posts, I have also warned of a MAJOR pullback from the retest of the 1,570 all-time highs. Simply put, I do not believe the global economy is stronger than it was in 2007. Further, I do not believe President Obama has shown an ability or willingness to implement policies to strengthen the U.S. economy. Add to that the financial risks associated with the fiscal cliff, and I foresee a 10% - 20% pullback from the 2012 highs, whatever the level.

As such, I caution all investors to lighten up every 1% advance we see. Specifically, I suggest taking off 5% - 7% for every 1% advance in the market above current levels. Assuming a current exposure of 100%, investors should be at less than 50% exposure as we retest the all-time highs. More cautious investors could increase the amount of selling to 7% - 10% of their portfolio for every 1% advance in the S&P from current levels.

CofranCapital's Signature Fund is up over 19.5% on the year and I have been paring back exposure into the rally, from over 130% invested to 100% invested currently.

Source: Market Soars: Now What?