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The most wonderful time of the year, is it?

Holiday greetings and gay happy meetings aside, this notion is a hard sell for most attentive investors who own just about anything but United States Treasury obligations.

What with the Standard & Poor's 500 index losing 4.7% last week in a mere three-and-a-half days of trading, and the comprehensive Wilshire 5000 Total Market index shedding 8%, or $1.3 trillion, in value in seven straight losing sessions, tying the seven days ended Aug. 2 for the longest skein since October 2008. Meantime, 10-year borrowing rates for the U.S. Treasury spent the entire week yielding less than 2%.

(Despite the typical superficialities voiced by soapboxers, there is no real irony in the fact that Treasuries retained their rock-solid bid in a week when the supercommittee in Congress opted to ignore a Congressional mandate to find $1.2 trillion in spending to forgo over a decade. Both sides were already incented to avoid compromise, and most indications pointed unequivocally to an underwhelming result from the supercommittee's work. Had markets reacted to the committee's failure to reach an agreement, they would have surrendered whatever remaining status they hold as efficient processors of new information.)

No, nothing on this side of the Atlantic, even where the Potomac River and Chesapeake Bay spill into it, can summon the bile into the mouths of investors more readily than what's occurring daily on the other side. The virtual boycott of European government debt continues. Overstressed Continential governments face ever-higher interest costs. The European Central Bank remains unmoved to respond and local banks are wheezing under the stress.

It's fair to say that markets here haven't so dreaded headlines from Europe since the days of coastal blackout orders and beachside patrols for Nazi submarines.

At the risk of over-explaining what's been unfolding for a while, U.S. markets are contending with an unwelcome process of tightening. This is not the textbook tightening of money growth orchestrated by the Federal Reserve in response to overheated economic growth or inflation, which gave rise to familiar Wall Street rules of thumb such as "Three jumps and a stumble," suggesting the third rate hike would stall stock prices. No, the Fed, of course, remains close to "maximum easy" with money production.

The tightening is occurring in Europe via several market mechanisms. Investors are extracting higher government-bond rates to compensate for dicey sovereign finances, with Italian and Spanish yields hitting euro-era records, and Germany suffering a spongy response to a bond offering last week. Banks then need to buy less and reserve more, reducing liquidity. They are also under regulatory pressure to shrink their balance sheets, and so some 500 million to 3 trillion euros worth of assets are being prepped for sale, by some estimates.

But who are the buyers? U.S. banks are similarly being ordered to keep leverage low and rebuild capital, and the Fed last week initiated another round of "stress tests." On top of it all, a seasonal ebb in market liquidity is upon us as year end nears.

Reuters recently quoted a London-based bond trader as saying, "Things have felt almost as bad as it was back during the Lehman days in terms of liquidity—it is increasingly hard to get any business done and, to be honest, we think it is going to get worse.''

Before the big New York investment banks became bank holding companies via shotgun marriages with the FDIC in the 2008 crisis, most closed their fiscal years Nov. 30, in part because their clients needed to utilize the banks' balance sheets as they themselves finished their years. Now we have everyone on a December year, in balance-sheet-shrinkage mode, and stiff regulatory mandates to curtail market risk. In other words, more sellers than buyers for risk, and therefore risk gets more expensive. The main index of credit-default swap prices on European governments hit an all-time high on Wednesday.

With all this playing out, the ECB remains both chief villain and the only potential savior, in the minds of many market participants. The bank's refusal to step in as lender of last resort to strapped governments is widely viewed as recalcitrant and doctrinaire, its gun sights on a nonexistent inflation threat while it disarms in the face of lethal financial contagion.

There's a line of interpretation that says the ECB, and its German play callers, are simply allowing the pain to build in peripheral Europe just enough to ensure that any eventual aid will be met with a sufficient degree of fiscal rectitude and political commitment by the beneficiary governments.

High-yield credit strategists at Bank of America Merrill Lynch last week put such a thought forward: "All in all, we expect EU crisis reaching a short-term boiling point again relatively soon—next few weeks to a couple of months—a moment that will likely push ECB into further action. That point will likely mark a near-term bottom in the markets, as uncertainty surrounding near-term funding needs is removed."

Maybe so. But doctors will also tell you that a high fever indicates the body is resolutely battling an infection, a reassuring prelude to recovery. The capital markets are clearly not sure the clinicians in Brussels know the point at which a fever implying effective immune response could turn fatal.

WRITING ABOUT THE STOCK MARKET these days feels like Mary Todd Lincoln might have felt if hired as a drama critic in 1865. The performance she last saw might have been quite respectable, but was rather overshadowed by the carnage that interrupted it.

What to make of the fact that long-term Treasuries, as measured by the iShares Barclays 20-Plus-Year Treasury exchange traded fund (ticker: TLT), has returned to within 2% of its Oct. 3 high, and that other signs of credit stress and risk aversion (bond swap spreads, the above-mentioned CDS index) are at their worst levels of the year—and yet the S&P 500 remains 5.4% above its Oct. 3 closing low for 2011?

If, as we've been conditioned to believe, stocks are always and everywhere the residual asset class, beholden to the more prescient bond markets, then equity investors are whistling past the graveyard (again). The fact that stocks failed to hold up in the typically strong Thanksgiving week lends this reading some weight.

Yet there's also a concept of "bullish divergences," instances where one instrument or asset class stubbornly refuses to go along with the prevailing story, often a sign that it's sniffing out a reversal in the recent trend. The Treasury/stock relationship in this light looks like an overstretched rubber band with a chance of snapping back.

Without suggesting that the prevailing mood among stock players is profoundly sour, this group is clearly flinching at the passing of most every shadow. It's no wonder, given that the Chicago Board Options Exchange has blanketed the platforms of Grand Central Terminal, entryway for Wall Streeters who live in New York's northern suburbs, with ads for its Volatility Index trading products as a means to profit from calamity.

Speaking of that index, known as the VIX, it has remained stubbornly high, above 34 at Friday's close, but is well above its early October lows and also below where it sat the last time the S&P 500 was at its current quote. Another thin reed for the bulls, perhaps. It probably doesn't hurt that corporate insiders largely quit selling shares, relatively speaking, in the past week, and the Economist magazine served up some juicy bait for optimistic contrarians with its new "Is This Really the End?" cover headline featuring the euro as flaming meteor.

These might be useful inputs for tactical traders sniping for a handful of basis points trading daily or weekly moves, but they don't address the larger structural investment predicament.

Dan Greenhaus, chief global strategist at institutional brokerage house BTIG, last week wrote, "We have been asking clients what the basis is for meaningfully and sustained higher equity prices, and quite frankly, the only notable response we get is that 'equities are cheap.' We counter by noting that multiple expansion is unlikely, margins are running out of steam and any hit to aggregate demand is likely to hurt profits more generally."

Fair enough, though at some level the relative cheapness of stocks can mitigate or at least foreshorten the episodes in which macro fears drive further equity selloffs. Given steady corporate results and a recent warming trend in domestic economic data, stocks arguably don't "need" to go back to or below the October lows in order to price in the ratcheting up of euro fears and assorted scary stuff on the cusp of what will be an exasperating political year.

Strategists at JPMorgan Asset Management last week produced an interesting paper on investing based on price/earnings multiples over long periods of time. It notes that while the average trailing P/E multiple for U.S. stocks since 1927 is 15, the market has rarely traded right at that average, and it has crossed this average level no more often than might be explained by random statistical movement.

Still, the impressively self-skeptical study shows that adjusting stock weightings according to a P/E-based rule works better than a buy-and-hold asset mix, and right now strongly favors stocks, if perhaps only because of artificially low interest rates.