Last Friday, SPX fell out of bed and lost over $53 or 2.4%. You might think that a negative GDP number or something equally disturbing had been reported. But nothing that logical occurred. A couple of the Fed governors had suggested in interviews that the economy might be sufficiently strong for another interest rate hike in the near future. If the Fed believes the economy has recovered sufficiently to handle higher interest rates, that should be good news. But traders hit the sell button. Does that make sense? I don't think so. But maybe I shouldn't be trying to view this market action so rationally.

Whether you have been trading the markets for the past 5 years or 30 years, you have never seen near zero interest rates at all, much less for several years in succession. So traders are in uncharted territory. Normally, the younger staff in the trading firm turn to the older staff and hear comments like, "Don't be too concerned, this looks similar to the markets in late 1987 after the big crash in October. Within a year the markets had recovered all of those losses." Today's market is unique. No one has seen this situation before. Consequently, market observers are nervous and tend to sell at the slightest sign of trouble. Consider the recent BREXIT panic as an example. The BREXIT vote scared traders and the markets sold off quickly. The fact that the effects of Britain leaving the European Union would not be realized for two years or more was known and well publicized, but it didn't matter. Traders were scared and hit the sell button. But this has happened many times over the past few years. Those same nervous traders have learned to "buy the dip". Thus we have the so-called "V-bottoms" that have been a common characteristic of recent markets. The BREXIT panic caused a loss on the S&P 500 of 5.3% in only two trading sessions; within four trading sessions, that entire loss was recovered, and the market continued to trade higher yet for about two weeks. Traders are nervous in this "uncharted territory" and sell upon the least rumor or speculation. But we are all well aware that we have been in a strong bull market, so we quickly "go all in" whenever we see market prices start to rise - hence, we buy the dip.

After losing over 2% last Friday, SPX recovered much of that loss on Monday, but then traded back down on Tuesday. SPX closed today at $2147, not quite back to last Thursday's close at $2181, but close enough that volatility declined almost two points today. What is a trader to do? Psychotherapy? Antidepressants?

As many of you know, I trade iron condors on the broad market indices every month. Before the market opened last Friday, I was planning to sell my November SPX iron condor. But all of the red ink stopped me. As I listened to all of the talking heads interview the gurus predicting "the sky is falling", I couldn't get too excited about this decline. As the day wore on, the indices started to stabilize and I decided to sell the November SPX 1890/1900 put spreads. As the markets rebounded on Monday, I sold the November SPX 1940/1950 put spreads. At today's close, the short puts at 1900 and 1950 are 1.7 and 1.3 standard deviations out of the money. This corresponds to probabilities of these spreads expiring worthless of 96% and 92%, respectively. Don't misunderstand. I was still focused on risk management. I sold only half of my normal capital allocation on Friday and was prepared to buy it back on Monday if was wrong. But, instead, I sold the balance on Monday at a higher index price.

This market remains volatile and unpredictable, so stay cautious and manage your risk carefully. However, rational analysis of market behavior remains a useful discipline.