Buyer Beware In This Schizoid Market

Are we on the verge of a full-blown bull market? Maybe, but keep in mind that
the past 12 months have seen a multitude of miniature bull markets, all of which
hit a wall. For the first part of the past year, however, the market acted
fairly normal. From late October 2010 to Feb. 18, 2011, the S&P 500 spiked
13.6%. Then, from March 16 to April 29, the market rallied by 8.5%. But
beginning in the summer, the market went haywire. From June 15 to August 22, the
markets saw three up-or-down moves of at least 7%. Now, since Oct. 3, the market
has soared by almost 17%. With such volatility, it would seem inevitable that
top traders, like Goldman Sachs (NYSE: GS ) and Morgan Stanley (NYSE: MS ),
would make huge sums, right? But this hasn't happened. The companies are
actually finding it extremely tough to make any profits. And even the world's
top hedge fund managers are lagging, such as David Einhorn and Bill Ackman. The
HFRI Hedge Fund Weighted Composite Index is off 5.3%. But the most notable loser
is big-time investor John Paulson. Despite having made billions from 2007 to
2010 – by doing things like shorting subprime mortgages and buying the SPDR
Gold Shares (NYSE:GLD) – he's had a horrendous 2011. His flagship Advantage
fund is down by 32%, as of the end of September. Like many other hedge fund
managers, he believed the U.S. economy would rebound and that there would be
continued opportunities in emerging markets, such as China. Yet the recent
"breakthrough" in Europe could mean more stability and the markets getting
back to normalacy? However, that agreement is still light on specifics, and it
doesn't really deal with the issues in Italy and Spain. What if these
countries start to crater? At the same time, the U.S. may have its own debt
crisis. Keep in mind that Congress' super-committee is required to make some
tough choices by the weekend of Thanksgiving, even though it looks like there is
serious deadlock. Might this lead to another downgrade to the US sovereign debt?
In other words, with the S&P 500 getting euphoric once again – even in light
of many lingering problems – investors should be cautious. As the past year
has shown, the markets can get suddenly cold. Tom Taulli runs the InvestorPlace
blog " IPOPlaybook ," a site dedicated to the hottest news and rumors about
initial public offerings. He is also the author of "All About Short Selling"