Market Reflections – April 2009
ByWe have just finished the month of March with an incredible run for the month of 8.5%. For the S&P 500 this is the best March ever. The market bottomed on March 9th @ 677. From the bottom, the market has risen 25%. Is this strong run over? Probably not – April is earnings month and the market tends to do well. Historically, April has been one of the best months of the year. From 1950 to 2008 the S&P 500 has produced an average return of 1.4% and has been positive 68% of the time. Over this time period it is ranked the third best of all of the months.
Most of the gain for April occurs during the first eighteen days. Historically, the first eighteen calendar days of an earnings month tend to be strong. From 1950 to 2008 the S&P 500 has been positive 71% of the time for the first eighteen calendar days and produced an average return of 1.4%. The strong performance is partly attributed to the investors pushing stock prices up ahead of earnings season. Alcoa kicks off the earnings season this week, but the bulk of the companies do not report until later on this month.
Investors like to get into the market ahead of the earnings release to take advantage of any possible positive earnings surprises. Currently, analysts are expecting earnings to fall 37% compared to last year (Thomson Rueters). This is the figure that is built into today’s prices. Given the relatively positive sentiment in the market recently, even if earnings come in as expected the market will react positively. Despite some of the poor data that has been released recently, such as, unemployment (a lagging indicator) at 8.5%, it is not all bleak: on Friday the government reported that factory orders rose 1.8% for the month of March.
On a longer term basis the market is at a key level. On October 27th it was stated from a source that the market represented a buying opportunity. On that day the S&P 500 closed 849. The market rallied quickly to just over 1,000 before resuming its decline. Today the market sits at 843 and is essentially flat from my call in October.
In December it was stated from a source: “If we look at a shorter term graph of the S&P 500 we can see that there is support at 850 and resistance at 1,000. Both of these values have multiple touch points. If the market reaches 1,000 as I suspect it will over the next few months a lot will be revealed in the 1,000 battle. If the market is able to punch through on strong volume and sustain a rally, then this will be positive for the market longer term. If the market gets rebuffed at 1,000 then we will be stuck in the 850 to 1,000 trading range, waiting for a break above resistance or below support. There is still money to be made using seasonal trades in this area.”
Although the market broke down through the 850, both the 850 and 1000 levels are still key and need to be watched. We currently sit just under the 850 level. If we are able to crack through the 850 then this level should provide support. A run to 1,000 in the next month is probably overly optimistic. If the Bull Run continues for the next few months, the 1,000 level is going to provide major resistance and the market will probably get rebuffed at this point. More probable is a run to 925, which is still a healthy return. If the market does go through 850 with strong volume April should be a good month, barring any bad news surprises.
Last month the October 2002 low being key was being talked about. Although key support was broken I place a lot of credence on seasonally strong periods of sectors and the market, and typically use technical analysis to fine-tune the entry and exit dates. When there is still a significant amount of time left in the favorable six months of the market and a strong month approaching, I tend to defer to seasonal trends for the fear of being whipsawed, I typically need strong confirmation from several signals to consider exiting or reducing a position.
Next month in May. 2009, I will discuss playing the end of the Six Favorable Month strategy and timing a more defensive stance in the market. At this time I am maintaining a stay in the market strategy to take advantage of the typical positive monthly results for April.
