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I love mornings when you wake up and S&P futures are 2% higher before dawn... and then they are 3% higher before the NYSE open! As I said on November 3, when the Euro-mess was the primary weight on an otherwise strong stock market and I bought the fear the day Greece went rogue, you have to be prepared for these days...

So, now that we just made 40 S&P points, is it still up, up, and away from here? The market could definitely run away higher from here. That's a clear risk for equity fund managers who don't want to be caught under-invested at this time.

And I love this kind of tension too where, after months of bearish sentiment, all it takes is a good news catalyst that removes doubt about something (like European systemic banking contagion), and you can move another 30 points higher before the open (like the S&P did last week on Thursday October 27).

By the way, that kind of strong "Good morning and how the heck are ya!" where the futures are 1-2% higher before the opening bell rings is fund managers scrambling to get exposure. They use the S&P futures because it's the fastest, most liquid vehicle they have.

But not all are this nimble. And lots of that futures buying is by hedge funds putting the screws to the portfolio guys. Yes, markets fall faster than they rally, since panic is often stronger than greed. Yet, a surging market is also a wonder to behold, especially if you are already long and watching other investors chase your stocks.

That's why you want to have some core long positions so that you are invested in this potential, not chasing it. And then you wait for other fear-driven dips to buy.

So while I had the first target in this slide correct -- the drop to S&P 1,150 once we took out 1,225 and 1,200 -- I was somewhat blind to the sleepy holiday market just waiting for another weekend of euro risk to pass. I was looking for more fear to give us a better buying opportunity.

Apparently Santa went shopping with a vengeance and was ready to buy stocks on the next real work day. And the fear was to the upside as being under-invested is usually a bad play at this time of year. Throw in a healthy does of scaring the bears out of their shorts and you have an up 3% opening.

Volatility and Valuations

I should have taken a page from the playbook that has worked all year for me: when volatility is contained and stocks reach compelling valuations again anywhere near S&P 1,100, money managers can't resist.

But this raises the question, "Which money managers?" Because they can't all be right. Then the market would truly be some weirdly efficient machine, instead of the dynamic, complex and barely predictable system it is.

The thing is, stocks can drift lower without heavy institutional selling. All it takes is a buyer's strike by some big and smart funds who just step back and let others hit the sell buttons.

So while I thought we needed more fear to wash out the final weak hands and truly test the 1,140-1,150 area, the biggest owners of the market just were never that scared. Indeed, they were licking their chops.

Exactly what I've been saying -- and trading most of the time -- since August. Give them a little reason to see how Europe could right the ship and the buyer's strike is over.

For my trading, I didn't get burned too bad. I had one short position via the S&P 500 3X Bearish ETF (SPXU) and reeled 1,000 shares back in before the open to keep 2.5% of the 10% open profits I had.

Will this rally be sold by the smart money? That's a good question. If this is about Europe taking real action to stem the crisis, I don't think so. If this is another eurozone "let's wait till the next meeting" moment, then we may have to test S&P 1,175 again before next week's EU summit.

Be sure to check out my other column today on how Germany continues to control the game over there -- even if through apparent inertia.

Kevin Cook is a Senior Stock Strategist with Zacks.com
 
Zacks Investment Research