April Outlook: Rally Continues, But End of the Best Six Months
By: Jeffrey Hirsch & Christopher Mistal
March 31, 2016
Despite a little end-of-Q1 profit taking today – very little – stocks have been on an upward tear throughout March, bucking the pattern of late month weakness. The week after triple-witching did display its usual weakness. We expected a strong March and April rally on the heels of the nasty down January and February. But the usual end-of-March respite has been mollified by the sweet, dovish and measured words of Fed Chair Yellen.
We expect the market rally to continue into and through April, but to fall short of new highs and then begin to retreat later in the spring into the summer lull and the Worst Six Months (“Sell in May”), stabilizing after the conventions, rallying again into yearend, but falling short of new highs yet again.
But for now the path appears to be higher and the first trading day of April has been a boon to traders – up 76.2% of the time on the DJIA and S&P 500 over the last 21 years with average gains on the day of about 0.5% NASDAQ has been a bit less strong, two-thirds of the time and Russell 2000 is up 61.9% of the time.
[First Trading Day of April]
Most importantly, April 1st is when begin looking for our seasonal MACD sell signal and corresponding early signs of seasonal weakness. While market strength should continue, look for it to stall near resistance around S&P 2075-2100, NASDAQ 4950-5000 and DJIA 17875-18000. As the Chair’s dovish remarks become a thing of the past and earnings season comes to a close toward the end of April we will be poised to shed underperforming positions and take a more cautious and defensive stance for Worst Six Months May-October.
Any time on or after April 1 when both DJIA and S&P 500 MACD Sell indicators trigger a sell signal, we will issue an Almanac Investor Alert. We will either outright sell specific positions or implement tight trailing stop losses. Bearish/defensive positions in: iShares Barclays 7-10 Year Treasury (IEF), iShares Barclays 20+ Year Treasury (TLT), AdvisorShares Ranger Equity Bear (HDGE) and/or other protective strategies will also be considered. All stock and ETF holdings will be evaluated at that time. ETFs providing exposure to sector seasonalities ending in April and May along with underperforming stocks in the Almanac Investor Stock Portfolio may be sold at that time as well.
Pulse of the Market
The rally that began in mid-February continued through March. DJIA and S&P 500 are now modestly positive for 2016. NASDAQ and Russell 2000 are lagging and have not yet eclipsed their respective 2015 closes. Due to the pace of the rally, both the faster and slower moving MACD indicators spent most of March positive however; last week’s mild decline has turned DJIA’s faster-moving MACD indicator negative (1). DJIA has also bullishly remained above its 50- and 200-day moving averages (2).
Dow Jones Industrials & MACD Chart
Even though February ended with the fourth Down Friday/Down Monday (DF/DM) of 2016 (3), the rally continued. DJIA (4), S&P 500 (5) and NASDAQ (6) racked up five straight weeks of gains before typical week-after-March-option-expiration weakness took its toll resulting in a minor weekly loss last week. With kind and reassuring words from Fed Chairwoman Yellen, the market avoided post-Easter blues and has now fended off typical end-of-Q1 weakness this week.
Aside from last week, NYSE Weekly Advancers easily outnumbered NYSE Weekly Decliners (7) by a healthy margin during the market’s five-week winning streak. The sustained streak we were looking for last month was delivered.
Throughout the market’s run, New Highs also began to increase and New Lows shrank to just 27 (8). This was the fewest number of New Lows since January 2013. Should the market sustain its move higher into and throughout April, New Highs should begin to expand especially if the market encroaches on its previous all-time highs from last May.
Weekly CBOE Put/Call remains elevated at 0.82 last week (9). This suggests that there is plenty skepticism about the current rally which leaves room for it to continue at least in the near-term. Recent readings near 0.60 or less have coincided with interim tops.
Click for larger graphic…
Pulse of the Market Table