The stock market began the month of April with an inauspicious start, with the S&P 500 Index (SPX), the Dow Jones Industrial Average (DJIA) and the Nasdaq 100 Index (NDX) all plunging sharply on Monday, down by 2.2%, 1.9% and 2.9%, respectively. But if history is any indication, the market has a good chance of staging a rebound this month, according to Ryan Detrick, senior market strategist at LPL Financial. As he told CNBC on March 30, "From a purely seasonality point of view, April is a pretty good month and we think with this little bounce we got right at the end of March, here we think you have a good chance of it continuing."
Detrick also noted that the S&P 500 advanced in April during 9 of the last 10 years. Moreover, as he told CNBC, the average gain in April since 1950 has been 1.5%.
After noting that the S&P 500 had returned its 200-day moving average, Detrick added, "All in all, maybe it's just the market catching its breath for potentially more strength before the year is over." There also are fundamental reasons for optimism about stocks right now. The consensus among analysts is that the S&P 500 will enjoy earnings growth of 18% in fiscal 2018, as compiled by FactSet Research Systems Inc. and reported by CNBC. This is good news to Detrick. As he told CNBC, "We went back to 1991—11 times that the S&P 500 earnings were up double digits, the entire year was higher every time." (For more, see also: Why You Should Buy the Sell-Off.)
This April, a number of negatives threaten stock prices. Among these are the specter of trade wars initiated by President Trump, high stock valuations at this late stage of the bull market, and overcrowded investments in pricey technology stocks that could trigger a bearish stampede once they unwind. (For more, see also: Why a Trade War Risks Economic 'Chaos': Shiller.)
Another factor that may weigh on stocks through much of April is a regulatory rule that forces public companies to suspend stock repurchases starting five weeks before a scheduled earnings announcement and ending 48 hours later, Bloomberg reports. Since the beginning of the bull market nine years ago, companies in the S&P 500 have been the biggest buyers of their own shares, with repurchases of more than $4 trillion during this period, per data from S&P Dow Jones Indices cited by Bloomberg. (For more, see also: 5 Stock Corrections Show More Pain Ahead.)
BAML Indicator Points Up
Contrarian investors also are looking at the Sell Side Indicator from Bank of America Merrill Lynch. This is a snapshot the average equity allocation recommended by Wall Street strategists as of the last day of a given month. The higher it is, the more bullish strategists are as a group. It's a contrarian indicator given that, as BAML notes, extreme bullishness historically coincides with a bull market top, and extreme bearishness with a bear market bottom.
At the end of March, the indicator was at a 6.5 year high of 56.9%, unchanged from February. However, this is not yet high enough to deliver a sell signal, BAML says. "While we are still a long way from off from the current 'Sell' threshold, that threshold continues to decline, reflecting the secular downshift in investor appetite in the wake of the Tech 'Bubble' collapse and the Financial Crisis," they add. The buy and sell thresholds each are one standard deviation away from the 15-year rolling average for the indicator.
"Historically, when our indicator has been this low or lower, total returns over the subsequent 12 months have been positive 93% of the time, with median 12-month returns of +19%." The recent value of the indicator points to a 12-month price of 2,893 for the S&P 500, 12.1% above Monday's close. BAML hastens to add that this is not their official forecast, but just one of five factors that they use in developing it.