Friday, March 31, 2017

A Look Ahead To April

Looking Ahead
  • Last 20 years: April is the best month of the year with an average return of 2.01%
  • Last 20 years: The average April has rallied strong after tax day into month-end
  • Since 1950: April ranks 3rd in monthly performance with an average gain of 1.46%
  • The full year average gain is roughly 20% when January, February and March are all positive (note: The S&P officially closed March just barely in negative territory after a late day pullback on Friday)

Areas of Note

One area we're watching is the VIX term structure.  It is trading at the highs of the year but not yet at extreme levels.  While the VIX has been dormant thus far in 2017, it recently started to move higher as the market has pulled back.  The ratio below plots the VIX vs VXV.  When this indicator is rising it is telling us that the current volatility (VIX) is rising faster than the 3-month volatility (VXV).  Essentially it is another fear and greed measure.

The S&P hit a new all time high on the first trading day of March.  Since then it has pulled back and consolidated for the entire month.  This consolidation helped to work-off the excessive overbought readings created on March 1st.   The S&P corrected -3.25% from peak to trough in March while also breaking the uptrend line from the November lows.  However, the gap down on Monday (3/27) held support at the 50-day moving average.

The historical data shown above is quite favorable for April with tendency being for the market to rally into month-end after April 15th.  The current consolidation has served to work off excessive conditions while setting the table to resume higher.  At some point this market is poised for a bigger sell-off than 3.25% but we just may have to wait a little longer. After being defensive for much of the last month, the current pullback has allowed us to put some money back to work as the market attempts to re-take recent highs.

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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