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Q4 Market Really Is Better

What started off as a horrible month has turned into a very powerful market rally.

Consider that the S&P 500 is up over 7 percent, the CBOE Volatility Index (VIX) has gone from 45 to about 30, the dollar index has dropped 2 percent, and yields on the 10-year Treasuryhave increased 16 percent.

What's going on?

A combination of better U.S. economic news and better European news (including the Dexia guarantees) is producing buying, but it also appears to be producing a rather significant amount of short covering.

One trader noted that open interest on the S&P E-mini had been dropping in the past few days: "As the market is rallying hard, less and less in open interest which suggests the shorts are getting squeezed out and that is a big reason for the violent rally," he said.

"This move is very strong and powerful...and most people are confused...which indicates to me the PAIN trade is higher in US equities as no one is expecting this, so soon, so fast," he said.

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