November's Dream Rally A Nightmare For Some Traders

For stock market bears, last month’s blistering equity performance was like a B-movie monster that just won’t die. Although crude oil closed at five month lows, energy stocks managed a gain. Bond prices rose as well, even though GDP estimates were revised higher. And despite inflation and other concerns, consumer sales buoyed the retail once again.

Therein lies the problem with shorting stocks. One can get all the fundamentals correct, only to have the market ignore them and skyrocket. Short interest in stocks can actually serve as fuel for rallies, as savvy traders that buy heavily-shorted issues are rewarded when their weak-handed competitors are forced to throw in the towel and buy back the stocks they have betted against.

The ability of stocks to rise despite unfavorable fundamentals is the driving force behind sub-par hedge fund returns in November. Although the market scored big gains, many alternative strategies delivered returns in the sub-1% range. Of course, these same strategies didn’t suffer as much as stocks and bonds did in October, which underscores their value as portfolio diversifiers.