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Spring is in the air.
The sun is shining, the birds are singing, and the flowers are blooming. It’s the season of first loves and first pitches. It’s a time of rising temperatures and rising stock prices.
Over the past 50 years or so, the S&P 500 has gained an average of about 2% in April. Oh sure, some Aprils are more glorious than others. The gains in 2009, for example, were far greater than in 2010. But on average, stocks should end the month higher than where they begin it.
The part in the middle, however, could be a little rough. So before you go and bet the ranch on a 2% monthly gain, consider this…
Stocks have put on a terrific bounce over the past two weeks. The S&P 500 shrugged off a variety of global calamities and recovered just about everything it lost during the recent, wimpy correction. Now the market is overbought, overextended, and in need of a break.
Based on the following chart, it may be close to getting one…
This chart compares the performance of the S&P 500 (blue line) with the banking sector (black line). It’s usually a good sign when bank stocks are outperforming the broad stock market. Further gains are likely. When bank stocks are underperforming, it’s a sign of caution.
Since bottoming out two weeks ago, the S&P 500 is up 5%. Bank stocks, on the other hand, have barely budged off the floor.
This is a BIG warning sign that the recent gains in the broad stock market are too much, too soon. Stocks are due for a pullback.
Yes, April is usually a good month for stocks. There’s every reason to expect the tradition will hold true this year. But pick your spots wisely. There’s no need to rush and buy into an overbought sector. Instead, wait for a bit of a pullback before betting on this seasonal trend.
And be sure to take your profits by the end of April. The month of May is a completely different animal… But we’ll deal with that when we come to it.
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