Option Expiration Punishes Shorts/Puts

Top Line: The market should be close to a high with some selling coming back into the market this week.

We have not been doing too well calling this market the last week or two. We look back on our comments about the anticipated head and shoulders top formation and wonder why we didn't pay more attention to ourselves. We said that some would go short around 880 or 870 in the SP500 and the market would not give them what they wanted, a quick drop to 800. Instead, the market did drop to just below 870 and then it jumped to where it is now, about 935.

So, what is going on? The volatility indexes are trying to tell us that the market is overbought. This means that we should not be considering buying at this time, unless it is something that will go up if the market goes down. The last few days, the volatility indexes have gone down but there doesn't seem be much in the way of further progress. The volatility indexes by themselves would say the market is heading down.

Last Friday was options' expiration which the market seemed to think needed to punish the puts that were expecting to have a quick 10% drop after that head and shoulders top.

Our attitude is that the market still needs to go down, at least a little from here. We will continue to monitor just how much downside there may be. It still is possible to get this market back down to that 850 we've been talking about for a while now but we will stay focused to see just how far any downside will take us.