What to expect from April
Our “Best Six Months” Change strategy, which can be found in our Annual Stock Trader’s Almanac, is basically the flip side of the old adage “sell in May and go” explains Jeffrey Hirschseasonal trade expert and publisher of Stock Trader’s Almanac.
After decades of historical research, we have discovered that most market gains occur during the months of November through April. Investing in the Dow Jones Industrial Average between November 1 and April 30 each year and then switching to fixed income for the remaining six months has produced reliable returns with reduced risk since 1950.
As we enter the last month of the best six months, the market recorded its first quarter of declines in two years since the start of the pandemic. Going back to 1930, when our S&P 500 data begins in the first quarter, it was positive 55 years and negative 37 times over the 92-year period.
Overall, years that advanced in the first quarter rose 46 of 55 years or 83.6% of the time with an average gain of 13.2% for the S&P 500. Years in which the first quarter was down n were positive only 16 of the 37 years or 43.2% of the times for an average loss of -0.1%.
What jumped out at us was the mid-term years that lost first quarters. In the chart we have compiled here, the events of those years have a strange resonance with what is happening today in 2022. War, conflict, inflation, recession and rate hikes were common themes during these mid-term years.
Only three of those 10 mid-terms had significant gains: 1938 (war in Europe), 1942 (World War II) and 1982 (secular bull). Losses carried over to Q2 in all but 3 years: 1938, 1942 and 2018. Third quarters rebounded in all but three years: 1966 (Vietnam), 1974 (Oil Embargo/Watergate) and 2002 (Iraq). The only real problem in the fourth quarter was 2018, when the Fed raised rates too quickly.
In general, after a mid-term declining first quarter, the losses tended to continue into the second quarter and the market began to gain a foothold in the third quarter and recover in the fourth quarter. The protracted crises of 1962, 1966, 1970, 1974 and 2002 produced the most negative outcomes, although all experienced significant bear market lows.
At the crossroads of Q1 in 2022, we face similar conditions. Persistent hyperinflation, a rising rate environment fueling fears of an inverted yield curve/recession, the brutal war in Ukraine and the New Cold War 2.0 with Russia threaten a bear market amid heightened volatility that we have been warning since our annual Forecast report in December.
Continued low war support
Technically, we’re encouraged that the intraday low of February 24, the day Russia invaded Ukraine, held and survived at least one strong test on March 14. We used the NASDAQ 100 Index (NDX), which is followed by the Invesco QQQ Trust (QQQ), as our benchmark lately, as it has dominated the market in both directions for several years.
As we have illustrated in the chart below, the February 24th and March 14th lows with the late February/early March rally in between created a potential low W-123. The 14300 level around point 2 becomes support, which is also right at the 50-day moving average. The NDX encountered resistance around 15,000 and the 200-day moving average.
It was also encouraging to see that the market had recovered to the 200-day moving average. Recovering the 200 DMA again would be most constructive. Market internals are also improving, with progressives recently breaking through decliners and new highs breaking new lows.
Continuous technical and internal improvement is necessary for the rally to last. Barring a major escalation in Ukraine, we suspect the market will post further gains in April at the end of the best six months, then move sideways for much of the second and third quarters – and likely test lows before back to the fourth quarter and into 2023.