Questioning The Bullish Trend

Market Update 

This past week continues to show the underlying resilience of the current bull market. Despite weaker economic data, a surprise attack on Syria and continuing failures by Congress to move legislative mandates forward, the market, as shown below, continues to maintain its bullish bias. The short-term  “sell signal,” as noted at the bottom of the chart, has kept new money from being allocated currently as it suggests further volatility in the week ahead. 

As discussed last week, portfolios remain nearly fully allocated to the markets BUT have been adjusted for short-term tactical positioning. However, on an intermediate-term basis, the markets remain grossly overbought and very extended. As such, the possibility of a correction has risen markedly. The Fibonacci retracement levels suggest a pullback could take the market back to roughly 2100-2150 which equates to a decline of -8.7% to -10.8%. Of course, while such a pullback is well within norms in any one-year period, given the extreme levels of complacency by investors such a correction will “feel” much worse. 

Furthermore, the current extension of the market above the long-term moving averages continues to suggest caution in the intermediate term as the magnitude of a normal corrective action has been increased by the recent surge in prices. As shown below, volatility currently remains suppressed as some of the overbought conditions have been reduced. However, there is still a good bit of work to do in terms of the current consolidation process to allow the moving average to catch up to prices and not vice-versa.

As stated, portfolios remain bullishly allocated for now but with a cautious underpinning. We are still maintaining hedges until the current corrective action completes. Furthermore, we are currently maintaining “new money” in short-term cash positions and only selectively stepping into core long-term holdings with tight stop-loss levels.

April Stats

However, as I discussed on Tuesday:

“April begins the last leg of the market’s ‘seasonally strong’ period of the year, which is where the idea of ‘Sell In May And Go Away’ comes from. Of course, every year, there is always a litany of articles written about why it is such a bad idea, you need to just ‘buy and hold’, blah…blah…blah.

Importantly, ‘Selling in May’ does not necessarily mean ‘going all to cash,’ so can we please stop using extremes to try and prove a point. ‘Selling In May,’ at least in my world, is the process of reducing risk during a period time where historical returns have tended to be poor. Take a look at the chart below which shows a $10,000 investment into markets during the ‘Seasonally Strong’ vs. ‘Seasonally Weak’ periods. Did you really miss anything by skipping the summer months?”

While the month of March was lackluster at best in terms of performance, April has historically tended to be a better month overall. However, as we enter into the second quarter of the year there are several things that we need to focus on:

If the above turns out to be correct, then I suspect an April push back to old highs will likely provide the opportunity to rebalance overall portfolio risk.

If we look at the month of April going back to 1960 we find that there is a bias for the month to end positively 67% of the time. In other words, 2 out of every 3 April months finished in positive territory which is why it is included in the seasonally strong period of the year.

Unfortunately, the declines in losing months have wiped out the gains in the positive months leaving the average return for April almost a draw (+.01%)