Bloomberg.com: Put Options Indicate Pullback

According to stock option data compiled by the Bloomberg news service, the market could see a correction of between five and ten percent:

"Bets in the options market against the Standard & Poor's 500 Index have exceeded wagers it will rise by a 2-to-1 margin for a month, the longest since Bloomberg began compiling the data in 1995."

"That's seen as a warning sign the market is due for a decline of 5 to 10 percent after the S&P 500 rose to two records last week, say managers of almost $1 trillion at Morgan Stanley Global Wealth Management, National City Private Client Group and Russell Investment Group."

At current levels, a ten percent decline would knock the Dow down to around 12,555, while the S&P 500 would be at 1,394. It's certainly nothing devastating and it's definitely due. The current bull market has been one of the longest in history without a correction, thanks in part to the Federal Reserve pumping liquidity into the economy nonstop since the dot.com bust. Now, ten percent would be easy to swallow, but that's assuming it's only ten percent:

"The Leuthold Group, whose flagship fund has beaten 99 percent of similar funds over the last five years, expects the S&P 500 to slide as much as 19 percent by the end of the year."

Okay, now we're venturing into uncomfortable territory. A 19 percent pullback would leave the Dow at 11,300 and the S&P 1,255. These numbers would be a bit tougher to handle. Investor dollars would fly out of the country and unemployment rates would soar. Consumers, already hurting from the deflating housing market and the increasing gas costs, would spend even less. I think the sector with the most to lose is retail. I briefly mentioned the problems they're experiencing last week:

"Another sector that could feel the hurt is retail. Fewer homeowners refinancing mean less being spent at home depot or at the mall. We've already seen home depot's hurt. Bed Bath and Beyond has also lowered it's expectations in the last few weeks. The housing downturn might be blamed as the number one reason, but subprime is not far behind. And as the noose tightens around lending standards, the infusion of cash that has helped fuel earnings in retail will evaporate."

It's the housing market, and the tighter lending restrictions, and the rising food costs, and the rising energy costs. Individually they're containable; collectively they could do some damage.