After a massive move upward in just three weeks, investors have to be asking themselves this question: Do you trust this market? The S&P 500 is 200 points higher, the Dow is up more than 1000 points, and the Nasdaq -- which recently teetered on a major breakdown -- is now within striking distance of multiyear highs. Just before this rally started, it appeared everyone had given up on any kind of rally before year-end. In fact, there was talk of a swan dive toward levels not seen since 2009. Sentiment was as bad as could be, short interest was at its highest since 2009. Price action was so nasty and filled with surprises that every day seemed like a funhouse.
But then something turned. Maybe it was a light switch or just a call to order, but the buyers came with a fury at the end of the day on a clear October afternoon, leading to a 40-point rip in 40 minutes on the S&P -- game on! Is it coincidence the market has rallied during earnings season or into the European settlement deal? I'll let you answer that, but my best clue was a lower trend in volatility, the CBOE Volatility Index (VIX).
As we stand here on Halloween, the biggest moves of the year could be upon us. Seasonality issues persist and, with only two months remaining for 2011, many hedge funds are chasing performance as they lag the major indices. Ask any fund manager and they will tell you that the Super Bowl of trading starts now and finishes up at year-end. I've achieved some of the biggest trading gains during the last couple of months of the year -- up or down, it doesn't matter.
Still, it appears that not many have really embraced this market. Sentiment is still showing skepticism. The latest polls reflect the caution, and money has been leaving mutual funds at nearly a record pace. Retail investors are fed up, exiting in droves. Sound familiar? Yep, the crowd is usually wrong at turns. But with the many hits and whacks this year, who could blame them? But maybe now is the time to shelve that fear and put some trust in the market.