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Editor's Note:

(October 12, 2014)

Whew! What an ugly week. Volatility has roared back to life and the VIX ended the week near two-year highs. The Dow Industrials are seeing triple-digit moves almost every day. The S&P 500 is now down -5% from its all-time high set four weeks ago. Meanwhile small caps are leading the market lower with the Russell 2000 down -12% from its 2014 highs.

Everything seems to be in free fall. The only exception appears to be utility stocks and U.S. bonds as investors look for dividend yields to protect themselves. That makes adding new plays rather challenging.

We don't know if a -5% pullback to technical support at the 200-dma on the S&P 500 is enough to satisfy the selling pressure or if it's just the beginning of a deeper -10% to -15% correction.

Looking at the calendar we are definitely due for a -10% correction. The S&P 500 hasn't seen one in over 1,100 days. Normally we see a -10% pullback about twice a year. Bears would argue the market is long overdue for a major sell-off. The current bull market is over 5 and 1/2 years old.

All year long the U.S. market has managed to ignore most of the bearish headlines that were not related to the Federal Reserve's monetary policy. Yet that seems to be changing. Now that the recent FOMC minutes noted the Fed is watching the economic slowdown overseas suddenly the market is noticing just how bad the economic picture is in Europe and the weakness in Asia. These are not new headlines but now they seem to matter.

Lack of any real help from the European Central Bank only adds fuel to the fire that Europe is headed for another recession.

A major factor will be corporate earnings results and guidance. We're going to see a lot of that over the next three or four weeks. Disappointing guidance will fuel the sell-off. Bullish guidance will help build a new trading bottom for the market.

I suspect the next two or three weeks could be challenging for traders. We're likely to see volatility remain elevated. As a LEAPS investors I'd be tempted to step away from the market and just watch it for the next couple of weeks and then consider market conditions at the end of October. I mentioned in the market commentary tonight that the last 32 years have shown a 75% chance of the S&P 500 rallying from the end of October up to Christmas.

I'm not adding any new trades tonight. Our next entry point might be near Halloween. I would like to load up the watch list with potential trades between now and Halloween but it would be nice to see the market find some sort of bottom first.