By Chris Ebert

“ If Big-Money truly intends to drive the S&P to new all-time highs this March, it should not surprise individuals that the first step might be to take out as many of the individual traders’ stops as possible.”

This week’s analysis:

The S&P 500 has declined well off the all-time high recently achieved near the 2120 level. While the recent pullback off the high has not yet reached the 10% threshold (or 212 points off the high) to meet the traditional definition of a correction, it did indeed meet the definition of a correction offered by the options market.

As defined by option performance, a Bull-market “correction” would exist between a level of 2005 and 2057 for the S&P this week. That’s the range in which Covered Call* trading would exhibit some gains, but less than the maximum possible gains. Typically Covered Calls experience maximum gains during much of a Bull market, less-than-maximum gains occurring only during a correction, and losses occurring only during a Bear market.

Moreover, Long Straddles* tend to experience extreme losses during a correction, often approaching a level of 6%. This week, a level of 2005 to 2057 in the S&P is associated with extreme Long Straddle losses.

Welcome to Bull Market Stage 5

Thus, the dip into the upper 2030s on March 11 was enough to meet both options criteria for a correction:

Covered Calls still exhibited gains at that S&P level, but the gains were below the maximum amount possible for such trades. Long Straddles suffered losses approaching 6%.

A dip below 2005 before bouncing higher would have been considered beyond the scope of a normal correction, instead signaling a potential Bear market. Covered Call losses would have occurred below S&P 2005 this week, not the small gains normally associated with Bull-market corrections. Additionally, Long Straddle losses would not have been anywhere near the 6% threshold had the S&P declined that far.

A dip that did not fall below 2057 would not have met the minimum requirement to be considered a correction. Not only would Covered Calls have returned their maximum profit, but Long Straddle losses would have been well below 6%; neither of the criteria for a correction would have been met. Only a dip to the narrow range between 2005 and 2057 meets the options definition of a correction, and that’s exactly what occurred .

Now that the S&P has bounced higher, the correction can likely be considered complete, at least for a little while. The S&P 500 has now entered a zone known as the “all clear”, or Bull Market Stage 5. This stage can sometimes bring the most explosive growth in stock prices of any environment. The following analysis provides details as to why such growth can occur.

* All profits are calculated at expiration, as a percentage of the underlying SPY share price. SPY is an Exchange Traded Fund (ETF), the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) that closely tracks the performance of the S&P 500 stock index. All options are at-the-money (ATM) when-opened 4 months (112 days) to expiration.

EXAMPLE: If Long Call premium paid is $2 when SPY is trading at $200, the loss is 1% if the option expires worthless.

You are here – Bull Market Stage 5 – the “All Clear” stage.

On the chart above there are 3 categories of (more)