Another self-fulfilling prophecy may fail soon and those who “sold in May and went away” may start returning back to the market and chasing it. I warned about this possibility in a post in the beginning of May. The strategy of basically trying to enforce a self-fulfilling prophecy by acting first and then publicizing the act as a market rule is starting to fade with investors focusing on reality rather than on getting victimized by cheap mass psychology tactics.
I have said this numerous times: Price action is subject to probabilities and not to any fixed rules, especially when those rules are actually attempts to enforce a self-fulfilling prophecy the same way that the 200-day moving average was enforced by some in the past. Others in the 1940s tried to enforce chart patterns as significant rules the same way that astrologers tried to introduce planet aspects with zodiacs as having importance. Every serious trader and investor understands nowadays that classical patterns are random chart formations and following them quite often leads to disaster. See the bond and Russell 2000 examples to get a good idea of what I mean and how bad things can get for chartists.
It may be seen from the chart above that S&P 500 prices are getting close to their May 1, 2012 high. It appears that many of those who sold during May are now seeing higher prices. If the market starts getting an upward pressure from massive money chasing it to the upside, many naive fund managers who bought into this “sell in May and go away” thing will see the exit.
A combined QE by USA and EU will send massive new money to the stock markets and that in addition to the sideline money may drive the market to new highs for 2012 and beyond. This is a very optimistic scenario but one to keep in mind. Regardless, the ride will be very volatile and only strong hands will end up making a good return.
Disclosure: no relevant position at the time of this post.