We observed severe market drops repeatedly last year that proved, in retrospect, to be excellent buying opportunities. The last two days of trading provide one more example. SPX closed down $23 yesterday but gained $20 today to close at $1839. RUT also recovered almost all of yesterday's losses, gaining $16 to close at $1163. VIX declined a full point to 12.3%. So the bulls have done it once again. Perhaps the market gods are training us to "go all in" on the next dip and then surprise us with a severe correction (I don't have a better theory).

Trading volume fell off today as the markets rebounded with 2.2 billion shares of the S&P 500 trading. Trading volume declined by 12% on both the NYSE and NASDAQ.

SPX now has a pretty well defined sideways trading channel from a low of $1810 set in late November to the high of $1850 defined in late December. I think using those two levels as triggers for one's trading posture makes sense. In my opinion, the most difficult aspect of last year's trading was handling the frequent price whipsaws, similar to what we saw yesterday and today. The worst whipsaw of last year was a $46 swing on SPX in only four days! Why is this market so volatile?  I am sure there are many viable answers. I am inclined to think that the "great experiment" by the Fed in supporting this market has made seasoned traders nervous. They have never experienced a market with FOMC intervention of this type and aren't sure what to expect. As a result, their fingers are quick to hit the exit button and then jump back in at the slightest of signs. They don't want to miss such a huge bull market, but they also worry that the "great experiment" could end badly.

I think the lesson for us small fry trying to survive in this market of charging elephants is to be cautious and stay hedged; don't be afraid to exit early. I closed my RUT Jan call spreads in the market rally Friday afternoon; if I had waited, I could have done much better on Monday. But I don't think you can afford to take that chance. You might get stepped on by an elephant.