Are the markets at a tipping point and about to go over the edge? That seems to be the question on traders' minds. I haven't updated the calculations, but several weeks ago, I noted in one of my newsletters that the P/E ratio of the S&P 500 would be roughly back to the median of the historical range by simply trading sideways into October. So which is it to be? Will we correct and bring the market back in line painfully or simply wander sideways for a few weeks and blow off some steam in a more innocuous manner? If we look at the small caps, the answer appears to be that we are going over the cliff. Today RUT lost $16 to close at $1102 whereas SPX lost $6, closing at $1972. For the past few trading sessions, SPX appears to be setting up the area around 1965 to 1970 as a solid support level. But that could just be a temporary stop on the way lower. If we continue sideways for another week or so, we will be into the next earnings cycle, and then we could see the markets tip one way or the other, depending on the market's reaction to various earnings announcements - always hard to predict.

Today's market action occurred on huge volume, as the big funds made last minute changes to portfolios to "look their best" for the third quarter statements. Over 2.3 billion shares of the S&P 500 stocks traded today; volume was up 26% on the NYSE and was up 21% on NASDAQ.

Volatility rose less than a half of a point with the VIX closing at 16.3%.

The Case Schiller home price survey posted a 6.7% gain for July, down form June's +8.1%. The Chicago PMI dropped a bit in September with a 60.5 reading, down from 64.3 in August. The consumer sentiment survey from the Conference Board was up huge in August at 93.4, but came back to earth in September with a reading of 86.0. The consumer sentiment surveys from the University of Michigan appear to have less scatter in their data.

So the broad blue chip market is holding up well, but small caps continue to fall off. That is a concern. I don't regret my decision to close the put spreads in my October condors. RUT is now trading lower than it did at the bottom of the early August correction, and is over $50 below its 50 and 200 dma. But SPX is now solidly below its 50 dma, so RUT's weakness may finally be contagious. I think it pays to be conservative at this point. If in doubt, close or hedge.