April and May were bipolar months for stocks each of the past two years. And I expect the same bipolar behavior this coming April and May. April historically is a strong month for stocks and should be as well this year. The main reason is April is the second biggest month for inflows into stocks after January. Why?
Two reasons. Tax oriented investing; and start of the new quarter inflows. Over the next few weeks a lot of tax-oriented money will be going into equity ETFs. For what it is worth, more and more tax-oriented investors are now using ETFs instead of mutual funds. That new money should keep stock prices up through at least the end of the month. After that, looking at what happened in 2010 and 2011 in part is why I expect the stock market to give up its 12% 2012 year to date gains starting in May.
In 2010 the S&P 500 rose almost 5% the first three months of that year and then popped an additional 3% in April before topping out the second trading day of May. Then the S&P 500 dropped 13% by the August 2010 low.
Similarly 2011 mirrored 2010 as the S&P 500 rose a bit over 5% the first three months of that year and climbed an additional 3% in April 2011 as it did in April 2010. Then starting the first trading of May, the S&P plunged 18% by the August 2011 low.
In other words, the stock market in 2011 mimicked a similar trading pattern to what happened in 2010 for the entire year. And I would not be surprised if 2012 is the third year in a year that the stock market rises the first four months of the year before plunging over the next few months.
Why has the stock market risen the first part of each of the past three years? The answer is simple. The Fed has front loaded money printing each year, QE1 in 2010, QE2 in 2011 and Operation Twist this year.
Last year, the US economy grew at its fastest pace during the first part of the year and then growth slowed dramatically. This year, while the US economy is growing at a slower pace than it did to start last year, government numbers are showing faster growth, even though the economy is not.
During the first quarter of 2011, using income tax collections, we were reporting stronger employment and income numbers then at that time were the Bureau of Labor Statistics and the Bureau of Economic Analysis. Lo and behold recently the BLS and the BEA revised upwards their start of 2011 numbers to roughly equal ours. This year we are reporting lower numbers than the BLS and BEA and fully expect the government to revise lower its estimate of current growth, but those revisions won’t be released until after the November elections.
So far this year stocks are up more than each of the last two years. Perhaps that is why we are seeing a bigger drop in corporate buying and a bigger increase in corporate selling this March and in the prior two March’s.
Since the August 2011 market bottom, corporate buying has been the sole source of new cash for stocks. That is why after this Aprils inflows are spent on equities, and if corporate selling keeps growing I fully expect the stock market to give up all of its first quarter gains, if not more, over the next few months.
President & CEO TrimTabs Investment Research
Portfolio Manager, TrimTabs Float Shrink ETF (TTFS)
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