It is one of the basic theories of markets that the past does not predict the future. The solid basis for this is that if you can be sure something is coming in the markets you will trade the event to death.
The killer blow to killing a predictable event is that most people will jump the queue to cash in and by doing so destroy the opportunity.
If the market is going to go up 1% in the last hour of the last trading day of the year, you will buy 1 minute before that hour. Sadly some joker knows this and will buy 2 minutes before and some other spoilsport 3 minutes before. They are greedy so they will buy everything till the 1% rise has happened, leaving no profits for you.
Some other clever fellow will find a technique to buy the day before and before you know it the 1% rise in the last hour has gone; the move happens days or weeks earlier and is lost in the noise of greedy queue jumpers trying to grab everything.
The invisible hand is a grasping greedy claw, but it does make markets very efficient.
So here we are heading for May. The past charts of America and Europe show it’s when the markets dive for no good reason except that they always do.
Last year was different. Stocks didn’t collapse. They slumped a little but nothing like 2012, 2011, 2010 etc and of course 2008 in the crash. Instead gold collapsed.
The reason for the “Sell in May and go away” slump is supposedly the general summer malaise in Europe and the US due to holidays and nice weather. But the markets never sleep, so this shouldn’t happen.
So what is going on?
I believe it is rebalancing season for sovereign wealth funds. Their portfolios need to be managed like anyone else’s but the disruption of moving billions of real positions around, rather than billions of speculative froth the market normally deals in, hurts liquidity and causes the markets to temporarily flounder.
It is like a fat finger trade but done through necessity, not by accident.
I am reliably informed that the collapse of gold last May was created by the Bank of International Settlements, but like most rumours in the market, you should believe the opposite.
It is uncanny that May has the same dislocation every year, but the process necessary to rebalance the many sovereign wealth funds in the world takes time to get going. Similarly, a fund will start selling a stock after its important news at 10am, having held the meetings and sent the orders to sell a price-bending lump of stock. The bigger you are in the markets the harder it is to move without leaving your footprints behind.
So May is coming; what is there to do?
An investor should do nothing, but always ride out these bumps.
However, we should all look to see what falls out of favour. If the last few years are to be a guide and shares fall out of bed, it will be a good time to let the slump pass then fill up on equities. They tend to come roaring back.
Equities have had a great run in the US so if they fall it will be no great surprise. If they don’t fall then perhaps we might be about to enter a boom phase in US stocks that will mimic the sort of bullish madness the developing markets enjoyed a few years ago.
If gold collapses again, then buy, because there is a boom and bubble coming in the developed world and gold will be a good thing to own when the bubble bursts.
The writer is CEO of ADVFN.com, a financial stocks and shares information site, and author of 101 Ways to Pick Stock Market Winners. Opinion expressed here is his own and does not reflect that of Gulf News.
