Do You Trust This Market?

I guess after a massive move up in just three weeks one has to be asking themselves this question.  200 points higher in the SPX, more than 1000 points higher in the Dow and the Nasdaq, teetering on a major breakdown is now within striking distance of multi-year 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 as bad as could be, short interest highest since 2009 and price action so nasty and filled with surprises everyday 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; a forty point SPX rip in forty minutes.

Game ON!  Is it coincidence the market rallies up 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, specifically the VIX (see chart).

As we stand here on Halloween, the biggest moves of the year could be upon us.  Seasonality issues persist, hedge funds chasing performance – many are lagging the indices with only two months remaining in 2011.

Ask any fund manager and they will tell you the superbowl of trading starts now and finishes up at year end.  I've achieved some of the biggest trading gains ever during the last couple of months of the year.  Up or down, it doesn't matter.

So, how many have really embraced this market?  Not many it appears.  Sentiment is still showing skepticism.  The latest polls reflect the caution, 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.