Over the last few days, while there has not been a big S&P 500 move, there has been a lot of bearish options activity. Currently the S&P 500 is below 2100, a level that represents the uptrend line from February. It is concerning that we are below it because it could signal a short-term top in the market. What has come along with this break is a flurry of VIX call buying for June and July. Now while most call buying in the VIX tends to be for hedging these purchases were at the 17 and 18 strike. This leads me to believe that these speculators are betting that the Fed meeting next week will spark a sell-off. After Friday's strong job report it increases the likelihood of a hawkish statement.
This last pullback was really as typical as they come. We had a geopolitical event that caused the VIX to jump significantly. And what happened next, is that everyone started calling for a big 10-20% correction. Then, cooler heads prevailed, and institutions came roaring back and bought this market head over heals. Over the last few years, there has not been one geopolitical event that has caused a correction of more than 5%. In addition, the technical picture was so clear. We had an overbought reading on the RSI, and the pullback alleviated that. We went from a 70 RSI on the SPY to a 30 RSI. But, what is really making this past pullback so typical?