The long-awaited correction that the bears and under invested bulls have been praying for may finally be at hand.

After a 36% vault by the S&P 500, many market watchers have predicted a stiff retracement. However, market history shows that most moves go on longer than most expect it to and this one is no different. Thursday saw the largest down volume in seven weeks according to IBD, which is a sign that a short-term top has arrived.  Yet Friday’s action showed how stubborn the bulls have gotten.

Of course, just because the market corrects doesn’t mean the bears were right. Those folks that said we couldn’t rally at all and that Dow 5000 was inevitable, shouldn’t deserve credit even if the correction has begun.  When a rally takes off without a lot of people on board, those that are left behind tend to become vocal and skeptical. They try to will the market lower with all their being, but the more of these people there are, the more likely the market will bound higher.

Thursday was the first day since this huge rally began that made me think we are going lower. I have never been a sucker for slogans, but “Sell in May and Go Away” does seem to have historical merit. That coupled with Thursday’s action leads me to believe that the path of least resistance is down rather than up. Stocks that have led the rally got smacked down and more defensive stocks such as Abbott Labs (ABT) and General Mills (GIS) rallied smartly.

For the record, I do not believe we are going to retest the lows again. Despite the dour economic news continuing, there have been concrete signs that the economy has bottomed out and has even begun to pick up a bit off the lows. I do think that the recent phenomenon of strong rallies based on “less horrible than expected” news has run its course. However the market did rally after Friday’s “less than apocalyptic” report. It will take meaningful and sustainable economic growth and evidence that the recovery is sustainable and gaining steam to produce meaningful upside from here. I don’t believe we are there quite yet in the business cycle, which is why I think this is a logical point for a little retracement of the rally.

So where do I think the market goes from here? The bulls may still have some gas to run the Dow close to 9000, but those last 500 points are going to be quite tough.  I believe that a 10% correction from here is likely, and would be surprised if we drop any more than 15%. This means that the Dow should find a base around the 7400-7600 level. I have just gone to a 25% cash position in my personal account in anticipation of this. Foolishly, I didn’t raise any cash the last time the market rallied and it proceeded to hit new lows. As I said, I don’t foresee new lows, but I think the prudent thing to do would be to raise a little cash and take some of those gains off the table. The next powerful leg of the recovery should spring off the 7500 level on the Dow and could take us over 10000 by year end. Until then, it will pay to be more cautious.