Have faith, will rally!

More than one market participants have been heard muttering "this market wants to rally", since the crisis in Europe is not tanking the equity market today vs. two months ago.  For over a week now, every day, when jitters out of Europe drops the indeices by 1-2%, some dubiously good news out of Europe invariably boost the indices back up and some more, all within the same trading session.  To bolster their bullish case, they point to the supposedly low forward-PE ratio of the S&P 500 (which is more like a BS indicator), and the seasonal bias for upside (Santa rally brings everyone bonus).

Sure, if your investing time horizon is the next 2-3 months, you might catch a yearend rally, provided your stomach doesn't mind the burning feeling when volatility rears its head on a daily basis (see the chart from Deutsche Bank).

However, this is a classic example of the institutional bias of Wall Street that cheers a potential short-term gain when everyone (especially those on the sell-side) wants to bag a yearend gift from Santa.  But this could be very hazardous to those who measure performance over a longer time horizon than one quarter or two.  But then, how many money managers can live without tracking relative performance to benchmarks?