Singin' In the Rain: Expecting a Bullish April

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 |  Includes: DIA, QQQ, SPY
by: George Spritzer, CFA

On Friday, I posted a bullish prediction in the weekly Ticker Sense Blogger Sentiment poll. While there are certainly many things one could be bearish about (Iran, sub-prime mortgages etc.), what has kept me bullish is highly favorable seasonality that is coming up in April. I believe there are three main reasons for this:

1) New money going into IRA plans to beat the April 15 deadline.
2) Tax refund money going into the stock market.
3) The third year of the election cycle means that politicians will do what they can to support the stock market in order to get re-elected.

I have tabulated the following S&P 500 returns for the last nine occurrences of a third year of a presidential election cycle:

1) Return from end of March through April 15 (first half of April).
2) Return from April 15 through end of April (second half of April).
3) Combined return for all of April.

2003- 1) +5.03% 2) +2.93% 3) +8.10%
1999- 1) +2.84% 2) +0.93% 3) +3.79%
1995- 1) +1.70% 2) +1.08% 3) +2.80%
1991- 1) +1.59% 2) -1.53% 3) +0.03%
1987- 1) -2.49% 2) +1.38% 3) -1.15%
1983- 1) +3.79% 2) +3.58% 3) +7.50%
1979- 1) +0.40% 2) -0.24% 3) +0.17%
1975- 1) +3.53% 2) +1.16% 3) +4.73%
1971- 1) +3.20% 2) +0.42% 3) +3.63%

For the first half of April in these nine years, the average (two week) return was 2.18% which is equivalent to an annual return of 67.63%! For the second half of April, the average return was lower at 1.08%, but this still annualizes to 29.34%. The combined average April monthly return was 3.29% which annualizes out to 47.46%!

The first half of April was up in eight out of the nine years. The second half of April was up in seven out of nine years. The overall April return was up eight out of nine.

Probably the easiest way to try to exploit this seasonality is to use liquid ETF's like SPDRs (NYSEARCA:SPY), NASDAQ 100 Trust Series I (QQQQ), DIAMONDS (NYSEARCA:DIA) or use open end mutual funds that do not charge exit redemption fees for holding periods of 30 days or more.