It’s the start of a new month, and if history is any indication, it could also be the start of some choppiness on the markets.
According to data compiled by the Stock Trader’s Almanac, the month of March follows a fairly consistent pattern of bulging upward in the middle and then tapering off toward the end.
“Rather turbulent in recent years,” the Almanac describes March’s fingerprint, “with wild fluctuations and large gains and losses.” The current graph of the S&P shows that the market could be putting in a top right about now, if it hasn’t done so already.
Let’s first look at some historical data that March generally adheres to, and then see how it is setting itself up for another March Madness on the Markets.
March’s Place in the Line Up
One of the best known market patterns that has proven itself extremely reliable over the decades is the “best six” and “worst six” stretches of the year. With remarkable consistency, the “best six” months of the year generally run from November to April, at which point the markets transition into the “worst six” months from May to October. That’s where we get the mantra, “sell in May and go away”.
For its part, March falls near the end of the “best six” months, and thus near the end of the annual bull run. Of these six best months, March ranks fourth best, with an average gain of +1.2% on the S&P 500 from 1950 to 2014, following the best three months of December (+1.7%), November (+1.5%), and April (+1.5%).
While the first half of March still has a good deal of upward momentum, a couple of downtrends regularly come into play during the second half that cause investors to take a little bit of profit halfway through the month, before piling in again on the last day of March heading into that final kick in April, which is tied for the second best month of the year.
March’s back-half woes begin on the third Friday of the month, which is the first “triple witching” event of the year. Triple witching marks the expiration of three important categories of investment contracts: stock futures, stock options, and index options. Triple witching occurs just four times a year in the last month of each quarter (March, June, September and December). Of these four triple witching events, March’s is the second lightest, behind December which is the lightest, and far from September which is the worst. Hence, while March’s triple witching event is expected to push the market lower, the pullback should be mild.
The second downtrending event to hit March falls on the last trading day of the month, which marks the end of the first quarter of the year. “March has been taking some mean end-of-quarter hits,” warns the Almanac.
Pension funds, hedge funds, indices, ETFs and other large portfolios are known to send the markets for some violent swings during these last few days of the quarter as they rebalance their holdings to bring their funds back inline with their objectives and allocations as promised to their investors. So much rebalancing takes place at the end of the quarter that volume already begins to increase a few days leading up to it. As the Almanac points out, during the last three or four trading days in March, the Dow Jones Industrial Average is “a net loser 17 out of [the] last 25 years”, or 68% of the time.
But we should receive a little bit of a saving gracing this year, given that 2015 is the third year of the presidential cycle which is generally the strongest year of the four. Where the S&P 500 index has averaged +1.2% in the month of March overall, it has risen an average of 2.1% in the March of pre-election years.
Spring Break May be About to Begin
A look at the S&P 500’s recent activity shows how a topping may have already begun taking shape a couple of weeks ahead of its normal mid-March cresting timeframe.
As per the index’s one-year graph below, the S&P recently reached another all-time high at the end of February, and has been cresting down for three sessions already (yellow). As well, the MACD (blue) has already seen its fast moving average start to point downward, while the Slow Stochastic (purple) has both of its moving averages pointing south. These are all indications that the market is overbought, and has begun buckling a little under selling pressure.
General Bias Still Bullish
Yet we mustn’t lose our composure heading into this pattern of seasonal weakness. Remember that the third year in a presidential cycle is the strongest of the four, with average gains on the S&P 500 of topping 16%. Know as well that the fifth year of the decade, which 2015 is, also marks the best year of the decade. Hence, 2015 has some very powerful upside forces working in its favour.
Most powerful of all is the still highly accommodative monetary policy of America’s central bank, the U.S. Federal Reserve. Although it could begin raising interest rates before the end of this year, such rate hikes should be slow and small, as there simply is not enough inflation and wage growth in the economy to withstand a stronger value of money. Even with a rate hike of as much as half a percentage point which most economists believe is higher than the Fed is prepared to entertain, rates would still be below 1% and would still be the lowest they have been in decades.
Thus, even if March does deliver its usual back-half retreat in prices, investors aught not make the mistake of selling into the pullback, or they’d be missing out on the surge that the markets can still deliver over the coming several years of this extended bull market cycle.
Rather, investors should be prepared with extra cash on hand to snap up their favourite stocks during the pullback toward the end of March when fund managers are doing their own rebalancing.
Indeed, a lot more than just our clocks will be springing forward in March, but our stock portfolios likely will too if we just remain patient during the month’s usual back-half retreat and add to our positions before the upward run resumes next month.