Wednesday, March 27, 2013

What to Expect in April

The best six months of the year are November through April. April is particularly strong, with the Dow up more in April than any other month over the past 20 years and the past 50 years.

Post-election years are particularly strong for April; according to Stock Traders Almanac, April is the second best month for the Dow and the fourth best for SPX. A number of good charts on performance during April can be found here.

So, all is good, right? A few caveats worth keeping in mind:

First, SPX has been up every month starting in November 2012. It has not also closed higher in April after that long a stretch in the past 15 years. Put another way, April has been strong partly because at least one of the prior 5 months has provided a dip. That hasn't happened this year. Since 1980, there has been a 5% dip before April 90% of the time (here).

Second, the post-election pattern is for a weak March followed by a strong April. March in these years is typically one of the worst of the year. Unless something dramatic happens Thursday, March will close up strongly (right now, it is up 3%). This pattern is apparently off.

Third, April has been a key turning point in many years in the past, especially the past 3. Those years bear a strong similarity to 2013. See the chart below. Why is it a turning point? Because April is also the last month before the traditionally weakest 6 months of the trading calendar, a period when bonds have a pronounced tendency to outperform (read here). Trade the trader.

The typical post-election pattern (black line) is a weak January-March followed by a strong April into mid-May. That hasn't happened in 2013. In fact, the "all years" pattern (green line) has been accurate although the trend in 2013 has been much stronger.

Finally, be aware that 1Q13 earnings start Monday, April 8. Factset expects a 0.6% decline over 1Q last year. At the start of 2013, expectations were for more than 2% growth in 1Q3. This obviously might impact investor sentiment.