By Charles Biderman
As we start the last week of March, seasonal factors are likely to create a very volatile stock market through April, taking investors on a roller coaster ride. That's despite two underlying bullish realities: The Fed is pumping up stocks by creating $4 billion of fake money every day, and companies are shrinking the float of shares by at about $2 billion every day.
However, I expect stocks will keep dropping this week. With the stock market up about 6% year to date, my bet is that many portfolio managers, particularly those who underperformed last year, will be taking profits this week from a very profitable first quarter of 2013. I also expect stocks to go up next week, the first week of April, which is the start of a new quarter. For some reason, many investors -- particularly institutional types -- like to invest the first week of a year, quarter, and month. If you go back in time, the first week of every month historically is the strongest week of the month. Add that that to the fact that April is the start of a new quarter. Therefore, lots of new money should flow into stocks next week.
However, I expect stocks will drop again in the second week of April, which is the week before April 15 -- tax day. My best guess is that billions of dollars of stock will be sold between now and April 15 to pay taxes. And when the market has been as strong as this one, up 20% since the start of 2012, lots of tax payers are waiting until the last moment to sell.
What happens after that? The pre-April 15 sell-off in stock prices has often been followed by a strong end of April. The reason stock prices usually rise after April 15 is again based on seasonal flows, as the billions invested in tax oriented investments are deployed by the end of the month. In the past, most tax investments went into mutual funds. These days, it likely will be exchange-traded funds.
The most dramatic example of March and April volatility happened in 2000. Remember 2000? The Nasdaq 100 (NASDAQ:QQQ) made its all time high the last week of March 2000 at over 4700. That is still more than 40% higher than today's 2800. Then, as portfolio managers sold stocks to lock in gains during the last week of that March, the QQQ dropped 15% in just one week. Then, during the first week in April, new-quarter inflows boosted the market and the QQQ popped 7% in just one week. However, starting the week before taxes were due, taxpayers began selling big time. From April 8 through tax day, the QQQ plunged an incredible 25% right up until the day after taxes were due. But as tax-oriented flows began to be deployed, the QQQ then rebounded 19% through the end of April.
Talk about volatility! A 15% drop to end March 2000 from the all-time high in the most volatile stocks of that era, followed by a 7% pop the first week of April. Then a 25% plunge the second week of April and then a 19% gain the last two weeks of the month. Let me emphasize that I do not expect that kind of volatility this April. But April could get pretty wild if corporate buying does not remain as high as it has been. To repeat, the main reason stocks plunged the week before April 15 2000 was that investors had left their April 15 tax payments in stocks until the last minute.
Today the market is up over 20% since the start of 2012. Not the double of 1999 and early 2000, but there are billions in capital gains taxes due as a result of investors who sold stocks this past year end to avoid higher 2013 tax rates. As those shares get sold the week before April 15, I expect a major sell-off.
To summarize, I think stocks will sell off this week and then rally a bit next week. However, starting Monday, April 8, I expect a sharp sell- off in stocks through the day after April 15 and then stocks should rebound through the end of the month. Again, all of the above is assuming everything else remains status quo, which it never does. Therefore, caveat emptor as to the above trading scenario.
For the historical record, some of you have recently asked me to reconcile my prediction that the Bernanke put would die last year with what I have been saying recently. I obviously was wrong that the stock market would peak last year. What I missed was that it was not lower interest rates that had been moving stock prices. Rather, what I missed was that some of the fake $4 billion created daily by the Fed has been flowing into the stock market, thereby boosting demand for stocks and raising prices.