Bluff in May and Sell in June

On May 3 of last year I wrote that “the market will punish those who sell in May and go away“.  And they were punished hard twice. First they chased the market and then they were squeezed out, only to see the market rallying again by year’s end. But this year it appears that the large sect of May sellers is bluffing to give the impression that they will stay invested with the intention to sell maybe in June and recover last year’s losses.

This game is inevitable in my opinion because a good percentage of the gains from managing money by speculative funds does not come from value seeking but from prevailing in a zero-sum game. This is what happened last year:

SPY_20130507

The sell in May sect brought SPY down to its 200-simple moving average in June of 2012 but then the market started rallying due to some other funds buying heavily equities.  By mid July May sellers started chasing the market propelling prices even higher. But then in September those that made the May seller chase the market started selling, squeezing them out. The squeeze stopped in November and the market rallied again.

May sellers lost a lot of money last year and underperformed the S&P 500 index and are now bluffing by staying in but I believe that their real intention is to reverse what happened to them last year and sell in June to squeeze the other funds and the general public.

Which brings us to an interesting question: what percentage of the moves in the stock market are due to bluffing and due to value seeking? I believe that in the long-term value seeking prevails but for extended periods of time, even for a couple of years, bluffing may be the dominant process.

Disclosure: no relevant positions.

Charting program: Amibroker (Charts created with AmiBroker – advanced charting and technical analysis software. http://www.amibroker.com/”)

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