Pundits of every stripe have been predicting correction for several weeks, if not months. So the market action yesterday and today shouldn't have been too surprising. The S&P 500 Index (SPX) has now lost 61 points since January 15th, constituting a pullback of 3.3%. And most of that was accomplished over just two days! Technical analysts will tell us that a market correction can't really be called a correction unless it exceeds 7%, so we aren't there yet, but we are nearly half way. In 2013, we had several pull backs of the 4-5% variety, and the brave souls who bought the dips were well rewarded. I have already drawn the 4% and 5% lines on my SPX chart at $1776 and $1758, respectively. Maybe I should add $1721 (7%). My analysis of this market boils down to three principal alternatives:

1) Just another 4-5% pull back, or

2) An authentic correction of 7-10%, or

3) The beginning of a full fledged bear market.

I haven't been shy about my conservative outlook. Government ineptitude and antagonism toward business are strangling private enterprise, so it isn't surprising that this is the slowest economic recovery in history. But the economy is muddling along in spite of all of the road blocks and hindrances. So the third alternative seems unlikely to me, especially with a Federal Reserve that is willing to do anything to prop up the markets. That leaves me expecting a pull back of some kind, but unsure of the magnitude. I think the current pull back could get uglier and move into the full correction mode, given some significant stimulus - something like the downgrade of our treasury debt that occurred in 2011.  If we just continue to receive mediocre economic data, I am inclined toward the 4-5% pull back scenario. But that doesn't mean I am loading up on SPX calls. I remain cautious.

SPX closed at $1790, down $38. RUT closed at $1144 for a loss of $28. VIX spiked up to 18.4% - and didn't pull back toward the end of trading. Hmmm. As you might expect, trading volume spiked upward with 3.1 billion shares of the S&P 500 stocks exchanging hands. Trading jumped 15% on the NYSE and was up 16% on NASDAQ.

This week was almost devoid of economic data. But next week will offer many possible market moving events:

Monday: New Home Sales and AAPL earnings
Thursday: 4th Qtr GDP and GOOG earnings
Friday: Chicago PMI and University of Michigan Consumer Sentiment

I closed the 1110/1120 put spreads in my RUT Feb iron condor today. That leaves me with a current P/L of +3% and a maximum potential gain of +8%, assuming scenario three plays out and the call spreads expire worthless. That adjustment will allow me to enjoy my weekend. I hope you can as well.