While I have not shorted aggressively (probably just a bit here and there), I have turned defensive in the past few weeks because of seemingly weakening market internals. One of the key indicators I am looking at is the performance of the financials. Looking at the relative sector performances (courtesy of StockCharts.com) below, you can see how financials have lead the rally since we bottomed out since March 2009 (brown line). This outperformance from the lows can be explained of course through the concept of "swing equals counterswing", meaning the larger the magnitude of the drop, the larger the corresponding rally, given how financials have dropped the most during the crisis.
However, despite the fact that this is a valid explanation of the outperformance, recent weakness in this leader among sectors has me a bit concerned. Take note we even have some negative reactions to stock offerings to repay TARP, most notably C (Citigroup). The XLF ETF is showing signs of distribution: 1) something like a "rounding top" with highs getting lower 2) momentum indicators like MACD getting weaker as we get further along this consolidation. The ETF is still in the trading range however and until it breaks critical support, which I idenfity to be at $13.86, it's difficult to jump the gun, and short-term rallies are very possible. However, it is something to bear in mind.
FD: No personal position
Disclosure: no personal position