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 3 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 (seekingalpha.com/article/316949-2012-cou... and seekingalpha.com/article/468871-after-hi...) 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.

I am currently up over 19.5% on the year and have been paring back exposure into the rally, from over 130% invested to 100% invested currently.

While my top holding have not changed much, I have adjusted several sector allocations in recent days and weeks. Recent additions include (PPL), (WIN), (ETP), (RGP) and (CTL). In addition, I doubled my position in (CSCO), closed my position in (FE) and halved my position in (T).

I have taken hedges off several positions in which price declines in the underlying stock have led to significant profits in the options sold against them. These include (CMI), (CSCO) and (TIF). In addition, hedges on (K), (AFL) and (CSX) are set to expire this week. At present, the portfolio is hedged against a 4.5% market decline. I will continue to employ hedging strategies to minimize risk of further pullbacks in stocks who have experienced near-term strength.

For now, the market appears to be perched between 1,320 and 1,360. A significant catalyst in either direction could push us out of this range in the short-term. I see downside potential to 1,280 and upside to 1,440 over the next 3 - 4 months. Longer-term, I am growing slightly more cautious than I have been in the last 18 months.

Overall Sentiment: Near-term range bound.
Portfolio Yield: 5.75%
Projection: Consolidation (+/- 5%) around 1,365.

Top 5 Positions:

1. iShares High Yield Corporate Bond (HYG)- 15.4%
2. Apple (AAPL)- 5.8%
3. Microsoft (MSFT)- 4.7%
4. Omega Healthcare Investors (OHI)- 3.3%
5. SPDR Barclays High Yield Bond (JNK)- 3.0%

Disclosure: I am long HYG, [[AAPL]], [[MSFT]], [[T]], OHI, PPL, WIN, ETP, RGP, CTL, CSCO, CMI, TIF, K, AFL, CSX

Notable additions to the portfolio in February include (K), (BDX) and (NLY). We removed our (CHK) position after a rapid run-up in early February. In addition, we closed out our position in (RRD), and trimmed positions in (ZMH) and (TGP).

We remained active hedging the portfolio with covered-call selling. Presently, 58% of the portfolio is hedged with covered calls, up from 39% at the end of January. Overall, the portfolio is hedged against 5.5% market decline. I remain committed to this hedging practice, as I see risks of a pause or pull-back in recent market activity.

At 1,364, the market is at a critical level as it tries to digest the 2011 highs. I expect this level to remain an important battleground for the bulls and bears. In the short term, downside risk of 2.5% - 5.5% looks possible. Longer-term, I maintain my 1,440 target price in the S&P.

Overall Sentiment: Near-term cautious.
Portfolio Yield: 5.3%
Projection: Consolidation (+/- 5%) around 1,365.

Top 5 Positions:

1. iShares High Yield Corporate Bond (HYG)- 15.5%
2. Apple (AAPL)- 5.5%
3. Microsoft (MSFT)- 4.9%
4. AT&T (T)- 3.2%
5. Omega Healthcare Investors (OHI)- 3.2%

Disclosure: I am long [[HYG]], [[AAPL]], [[MSFT]], [[T]], [[OHI]], [[BDX]], [[K]], [[TGP]], [[ZMH]].

Fortunately, extremely low valuations in many blue-chips combined with necessary December 2011 tax-loss reallocations within the portfolio have yielded superb results. Through February 2, 2011 our portfolio has produced a 10.5% return, doubling the performance of the S&P. That performance is made even more impressive considering nearly 20% of the fund is invested in bond ETFs.

Thus far, the strategic shift discussed in my December 2011 Instablog post has paid off handily:

"As we have approached year-end, I have been aggressively selling losers to offset trading gains recorded earlier in the year. In addition, to achieve greater tax efficiency going forward, I have repositioned the portfolio for lower yield and greater dividend growth. I will be less active in capturing dividends in 2012 and more active adding to core positions on weakness. Currently the portfolio yields 6.84%, down from 8%+ through most of the year."

To help protect January's impressive portfolio gains, I have been actively selling long-dated out-of-the-money covered calls. Currently 39% of the portfolio has been hedged with covered calls, and the overall portfolio is hedged against a 3.6% market decline. I will continue hedging activities as the market rises and individual stocks in the portfolio demonstrate significant outperformance.

While seasonal bullishness is likely to continue in the short-term, I see significant headwinds as we approach the 1,350 level on the S&P. I expect a prolonged period of consolidation, and a possible 5% pull-back once the 1,350 area is reached. Longer-term, I maintain my 1,440 target price in the S&P.

Overall Sentiment: Neutral.
Portfolio Yield: 4.93%
Projection: Seasonal bullishness. S&P resistance at 1,350.

Top 5 Positions:

1. iShares High Yield Corporate Bond (HYG)- 15.6%
2. Apple (AAPL)- 4.7%
3. Microsoft (MSFT)- 4.7%
4. Teekay LNG Partners (TGP)- 3.9%
5. Omega Healthcare Investors (OHI)- 3.3%

Disclosure: I am long [[HYG]], [[AAPL]], [[MSFT]], [[TGP]], [[OHI]].

1. iShares High Yield Corporate Bond (HYG)- 11.7%
2. SPDR Barclays Capital High Yield Bond (JNK)- 8.4%
3. iShares S&P U.S. Preferred Stock Index (PFF)- 7.28%
4. New York Community Bank (NYB)- 5.55%
5. Annaly Capital (NLY)- 5.01%