Take your eyes of Cyprus for a moment, something else is heading this way.
May day.
Its easy to forget that ,
Here is some history.
2 May 2008 the market is at a 13058. It was no normal sell in may bu the time the market has hit the bottom in March of the next year the market had more than halved to 6470.
The Dow had been slipping as the credit crunch unfolded so it wasn’t as it May was something out of the blue. On May the 3rd the market stood at 11177, by the beginning of July it was 9662.
Did someone throw some kind of switch.
If they did it was the same one thrown on 2 May 2011, perhaps one that didn’t blow up the market. However the dow fell from 12875 to by the 9th of August 10605 and proceeded to scuttle along the bottom till October.
Surely this was just a collection of “Sell in May and go away” coincidences, nothing more.
1 May 2012 down the Dow goes again this time from 13338 to 12035 by the beginning of June.
What is going on?
There are three possible explanations.
Random stuff happens.
It is true that random stuff can create coincidences. You can toss a coin heads six times in a row and its neither difficult nor rare. It also looks pretty impressively like skill. Probabilities and statistics are good at playing tricks on our minds, so why not May stock market crashes. There is even stuff called black noise, where a random unlikely thing can cause a chain of random things which remain random, like floods on the Nile. If we think this is random then there is no need to worry and frankly if you had bought and held from 6470, why care about the May stock market wreck, things turned out just fine. I can relate to the Ostrich investor, sticking your head in the sand during worrying times works just fine most years, except of course 2000 or 2008.
Everyone is pre-empting “Sell in May”
We’ve all heard the saying “sell in May and go away, don’t come back till St Ledger day” (That is Mid-September to those not into horse racing in the UK.)
If investors all dump stocks accordingly of course the market will tank. However these days the bulk of the market action is institutional and algorithmic. Are they that amateurish. Surely they should pre-empt the following rally to such an extend as to neutralise it like all the other market inefficiencies. Maybe they are doing just that?
Rebalancing of global hedges.
Every year the US and Europe throw the developing world $ 1,000 billion in trade surplus. That is a lot of money even in this era of QE. That’s anther $1,000 billion to get invested.
That means there are trillions of dollars of capital in the developed world that need to be hedged. That’s not going to be done ad hoc. Imagine the kinds of meetings that have to go on in the sovereign wealth funds of the world to look to rebalance and hedge their vast portfolios. It might take months to decide a year’s strategy, code it up on the Algo’s and press the GO button. It might even go wrong a make a flash crash….
The market is not going to like such a shift, it’s a liquidity squeeze and a market disruption purely because of the scale. That alone can knock stocks down the stairs.
When the flash crash hit, it wasn’t just stocks that were thrown into a look, it was currencies and gold and oil. Everything moved in lock step. Why because everything in the global markets today is linked together because it is cross linked, correlated and traded algorithmically. Apple, like Nasdaq, is like Yen, is like oil, is like orange juice, is like euro. If you pound untold billions of hedges through the markets it hurts values because it strains liquidity.
So here we are on the cusp of April. We get a May swoon again.
I think we will get a small one. In fact I’m keeping my powder dry for it. However Im hoping that this May will be a smaller move than before continuing the trend of small shocks we have seen in consequent years.
Perhaps random would flip another head, perhaps the market will be more efficient this time, perhaps the coder of the giant hedging algo may fine tune his robots better.
We will see, but May is soon so we will soon find out.
Now where is my bucket of sand!