The S&P 500 is on pace for it's 9th best first quarter performance since 1950. In my last article (found here) I looked at S&P returns in years following flat years. Since 1950, there have been seven flat (+/- 5%) years. In each of the seven occurrences, the following year produced positive returns for the S&P 500, with an average return of 28.46%
At current levels, the S&P 500 is up 10.85% for the first quarter of 2012. As stated above, if the quarter ended today, the S&P's year-to-date performance would rank 9th best since 1950. To get a better feel for where the market may be headed in the short and longer term, I looked at monthly, quarterly and annual returns in the S&P 500 since 1950. My findings support my previous notion that the bull market remains intact and that we are headed for a re-test of the all-time highs set in the second half of 2007.
To begin, I looked at April's performance since 1950. In all years in which the S&P's performance was positive in Q1, the following month (April) was positive 27 of 38 occurrences with an average return of 1.66%. In years in which the Q1 performance was greater than 2%, the following month (April) was up 23 of 30 occurrences with an average return of 2.00%.
To establish a medium-term trading bias, I looked at performance numbers for the period April 1 through June 30 (Q2) since 1950. In all years in which the S&P's performance was positive in Q1, the following quarter (Q2) was positive 25 of 38 years with an average return of 3.05%. In years in which the Q1 performance was greater than 2%, the following quarter (Q2) was up 20 of 30 years with an average return of 3.21%.
Finally, to further test my 2012 thesis, I analyzed performance figures for each year in which the S&P performance for the first quarter was positive since 1950. Out of 38 occurrences, 33 were followed by positive returns for the balance of the year (April 1 though December 31), with an average return of 9.22%. In years in which the Q1 performance was greater than 2%, the remainder of the year was up 23 of 30 occurrences, with an average return of 10.48%.
So what should you take away from this analysis? In short, it appears history is on the side of continued market strength. In addition to near-term upside bias, long-term historical performance suggests additional upside of approximately 10% from current levels. Should the markets behave consistent with my historical analysis following positive first quarters, we should see continued upside in the S&P to 1,520 - 1,540, resulting in a 22% gain for 2012.
Personally, I continue to put my money where my mouth is. I remain fully invested going into April and continue to add long positions in underperforming sectors and stocks. To protect profits and hedge against short-term volatility, I have been selling out-of-the-money covered calls against many of my positions.