Examining how the month of April shapes up for stocks after a big November-March rally
The following is a reprint of the market commentary from the April 2017 edition of The Option Advisor, published on March 23. For more information, or to subscribe to The Option Advisor -- featuring 10 new option trades each month -- visit our online store.
Over the past half-century, the six-month stretch from November through April has consistently proven to be the strongest for stocks. The benchmark S&P 500 Index (SPX - 2,345.96) has gained an average of 6.58% in this half of the year, compared to a 1.16% advance during the typically choppier May-October half. What this means, as we approach the end of March, is that we're on the cusp of entering the final inning of the stock market's most bullish seasonal period.
Given the gravity-defying momentum of the post-election "Trump rally" -- punctuated by record-setting highs for the major equity indexes -- we aim in this month's commentary to answer (1) whether it might be reasonable to assume that the S&P has already collected the bulk of its traditional bounty for this particular November-April cycle; and (2) how traders might most profitably play the remaining weeks before April's conclusion.
A month-by-month breakdown of S&P performance over the last 50 years indicates that April is matched only by December in terms of the strength of average return. In an average year, the index ends April up 1.48%, with 70% of returns positive. But while this context is a good jumping-off point, it would be less than accurate to describe the S&P action since November as "average."
In fact, as it turns out, there are only a handful of previous November-April stretches that can compare to the S&P's 2016-2017 showing. So far, the S&P has been positive in each consecutive month through February, and -- prior to Tuesday's sell-off -- it was also on pace to close March higher. The "breakeven point" for March stands at 2,363.64, which means the S&P (having found apparent support at its 40-day moving average) is only about a 0.8% bounce away from making it five monthly gains in a row, as of the March 23 close.
Over the past half-century, there have been only eight prior occasions where the S&P has managed such a feat. And, per the table below, April returns are generally in line with historical averages following such monthly win streaks, though they're somewhat less volatile than usual.
In the same vein, we measured April returns following past instances (of which there have only been nine) when the S&P notched a 10% or greater gain from November through the end of March, as it has of this writing. (For reference, the +10% level for the S&P is at 2,338.76, based on October's 2,126.15 finish.) In these instances, April has underperformed its usual returns, with just over half the returns positive and an average return of only 0.81% -- and note the near-flat median change of 0.03%. That said, such Aprils are generally less volatile than average (using the standard deviation of returns as a gauge).
"Less volatile than average" could well prove to be an ongoing theme next month, as historical returns from the last quarter-century show that the CBOE Volatility Index (VIX) tends to log its second-largest monthly decline of the year in April (second only to November). Already this year, for what it's worth, the average VIX level is the lowest on record through mid-March.
The prevailing takeaway from this quantitative analysis is that April is still likely to be positive -- and relatively light on volatility -- though the 2017 showing might lag historical averages, based on the strength of the November-April rally to date. Which brings us to the second half of our analysis; namely, how traders should look to play the next month of this robust period for equity performance.
Broadly, under-loved multinational companies (think McDonald's, Procter & Gamble, and Colgate Palmolive) could reward investors if the crowded "long dollar" trade continues to be unwound. More specifically, we've produced for you below a list of the 10 best and 10 worst S&P 500 stocks over each of the last 10 Aprils (among equities with at least eight returns). With volatility historically low, options are an ideal way to play your preferred bullish and bearish ideas -- not only are premiums cheap for buyers, but option purchases allow you to profit from directional stock moves in exchange for a far smaller upfront capital commitment, relative to trading the underlying shares directly.
