As the weak season for stocks approaches, it’s probably best to shift your big winners from the recent rally into more defensive vehicles, writes MoneyShow editor-at-large Howard R. Gold, also of The Independent Agenda.
Stocks hit new post-crisis highs on Monday, as the Dow Jones Industrial Average topped 13,264 and the S&P 500 index closed above 1,420.
Both have sold off a bit since then, as new worries have cropped up in the market—or should we say old worries in new bottles? Europe (again), the Federal Reserve not easing monetary policy enough, and what have you.
No one can predict the market’s direction over weeks or even a couple of months. But I think we’ll see a long-overdue correction as we move deeper into spring. The weeks ahead may be a good time to take some profits and move money into more defensive areas, though I certainly wouldn’t dump equities entirely.
Sam Stovall, chief equity strategist at S&P Capital IQ, says April is historically not the cruelest month—actually it’s one of the best months of the year for stocks, on average.
The Stock Trader’s Almanac ranks April second only to December in the performance of the S&P 500, with a 1.5% average gain since 1950. It’s the very best month for the Dow, which averaged 2% gains over that period.
And it’s especially strong, Stovall adds, when it follows two consecutive quarters of the kind we’ve just had.
“[In] the ten times we had first-quarter advances of 5% or more that also followed fourth-quarter advances of 5% or more, the momentum continued into April, with the S&P up 2.5% and the average recording an advance 80% of the time,” he told me in an interview.
That’s particularly true, he said, when we’ve had a rebound from either a severe correction or a mild bear market. (The S&P lost 19% from its April 29,, 2011 peak to its October 3 trough, within Stovall’s definition.)
This market has tracked those patterns particularly well, he told me: Historically, the S&P gains 14% in the first three months of a recovery from a sharp correction and 24% over the first six months. This time around, the S&P advanced 17% over the first three months and 29% in the first six months.
The big events for the market in April, besides the usual economic data, are first-quarter earnings, which kick off when Alcoa (AA) reports next week. The companies in the S&P have beaten expectations every quarter since they hit their lows in the third quarter of 2009.
“The bar is set excessively low” for this quarter’s earnings reports, Stovall said: Analysts are projecting only 1% earnings growth in the first quarter, and only 2% in the second. He thinks they will top those estimates.
But clearly, investors will pay just as much attention to the companies’ guidance as they will to the actual earnings numbers. If that’s as murky as it was last quarter, these companies may no longer get the benefit of the doubt.
Meanwhile, the pot is stirring in Europe again, and the object of the hand-wringing this time is Spain. An auction of Spanish ten-year bonds went poorly this week, as fewer bonds were sold at higher interest rates than expected. That immediately caused the euro to drop and European stocks to plunge Wednesday. The US and Asia followed suit.
Still, ten-year Spanish yields are well below the high-6% danger zone, and the conservative Spanish government actually has a plan to cut spending and raise taxes to reduce the annual deficit—even in the face of a contracting economy, a moribund housing market, and a 23% unemployment rate.
But though Spain is a chronic problem, I don’t see any catalyst for a meltdown this year. I think investors just have the jitters over a stock market that has come a long way in a short time.
- Read Jim Jubak’s take on the pain in Spain.
The technical signs of an overbought market are plentiful.
First, corporate insiders are selling shares hand over fist, at the highest rate since last May, when stocks peaked the last time.
Second, some investor sentiment indexes are pretty bullish: Last week Market Vane’s bullish consensus was 68% and Consensus Inc.’s bullish sentiment stood at 77%. Investors Intelligence’s spread between bulls and bears was more than 30 percentage points, the widest it’s been since last spring. (The American Association of Individual Investors’ index, however, was a mildly bullish 42.5% last week.)
Third, the CBOE VIX index, a widely watched indicator of market volatility, fell below 15 for a couple of trading days in late March, the first time that’s happened since the last market top in April 2011. The VIX moved up sharply to the mid-40s last August and October, as fear rose and stocks plunged.
Finally, Stovall pointed out that as of Monday, the S&P 500 was 13% above its 200-day moving average, more than one standard deviation higher. “With us being 13% above, we’re getting to a level of excess,” he told me.
That’s why he put out a note to clients Tuesday saying that “the 500 may have borrowed a bit too much from the future, and could now be in the early stages of a widely anticipated pullback.”
Stovall doesn’t think such a pullback will be deep—maybe 5% to 10%, which would put it near strong chart support levels of 1,330-1,340.
A couple of things on the horizon could move markets. The second round of the French presidential election will be held May 6, and if Socialist Francois Hollande defeats President Nikolas Sarkozy, as expected, it could provoke even more worries in Europe. (A Sarkozy upset could trigger a relief rally.)
- Read Howard’s analysis of how the political calendar could affect the markets.
Then, some time in May, Facebook will finally go public in the most anticipated initial public offering in years.
Naturally that will attract investor interest, especially if the social networking juggernaut’s shares are valued close to $100 billion, and it could have a bullish spillover effect. But according to S&P Capital IQ, the ten largest IPOs had almost a negligible impact on the market a month later.
And in late June, the US Supreme Court will issue its decision about the Obama administration’s health-care reform act, which also could move stocks.
- Read Howard’s analysis of who politicized the Supreme Court at The Independent Agenda.
So, given everything, if you were smart, lucky, or lazy enough to be in the market and make money, I think now is a good time to take some profits and either reinvest them later or put them aside for a rainy day.
Or you can shift some of your risky assets into more conservative sectors, like health care and utilities, that tend to do well in the second half of the year. Large ETFs that cover those sectors include Vanguard Health Care (VHT), the Utilities Select Sector SPDR (XLU), and the Consumer Staples Select Sector SPDR (XLP).
All in all, the market has been running a marathon all winter, and it’s time for a rest. This year, April showers may not bring May flowers, so it’s probably wise to gather ye rosebuds while ye may.
Howard R. Gold is editor at large for MoneyShow.com and a columnist for MarketWatch. You can follow him on Twitter @howardrgold and read his political commentary at www.independentagenda.com.