The Stock Market Is a "Whipsaw Trap"

Last week was a scorching "risk-on" week for the markets, as a putative "solution" to Europe's debt problems and a positive print for third-quarter GDP convinced investors that all pressing economic concerns have vanished. We observed very little expansion of trading volume, which is characteristic of markets where short sellers are forced to cover while existing holders raise their offers and reduce their size. For our part, Thursday was difficult, as our largely defensive holdings were clearly out-of-favor, bank stocks (which we continue to avoid) shot higher on short covering, and option volatility declined as investors abandoned the desire to defend against losses.