March 09, 2017 - Important Tips for Trading the Stock Market in March
Welcome the “Ides of March” This Year By Dr. Van Tharp Trading Education Institute
March – The New Happy Month
First, let’s talk about what happened in the last two weeks. We have had twelve days of consecutive new all-time highs for the Dow. This hasn’t happened since 1987 (and 12 consecutive days ties the record set then).
I know what you are probably thinking. The infamous Black Monday happened in 1987 when the market dropped 22% in a single day. While that’s true, Black Monday happened a full nine months after the consecutive high run that started the year. Plus, by the time Black Friday hit, the markets were WAY over-stretched to the upside — up a whopping 43% for the year. (Also, as a modest consolation for the damage done on Black Monday, the Dow actually finished up 2% for the year in 1987.)
We talked two weeks ago about the fact that markets rarely crash directly from all-time highs. Usually, a crash requires first some kind of technical formation involving pullbacks, rallies to lower highs and importantly, a reduction in market participation or breadth. So take those bearish howls you hear from certain analysts with a grain of salt.
In fact, a couple of studies show a high probability that March will continue the move higher in the U.S. stock indexes.
The first data point shows that March has had the highest returns of any month when we look at the last 10 years of data. Here’s a chart put together by LPL financial comparing each month across three timeframes:
As you can see, March is quite strong across all three periods and is especially strong over the past 10 years. Another important factor adds fuel to the intermediate term fire: April’s monthly performance numbers are very strong as well.
One of the good young quants out there, Ryan Dietrick, made the following observation, “Since 1950, when SPX closes green in both Jan. and Feb. (like '17), the final 10 months are higher 24 of 26 times and up 12% on average. Not bad.”
In addition to January and February being up this year, the market was also positive in December and in November. Detrick notes that this has happened only 13 times since 1950 and March followed through with a positive close 11 of those 13 instances.
Seasonal patterns (like an upward bias for March, especially after preceding months are up) can be simple statistical anomalies. That’s why I like to test seasonal tendencies against a fundamental reason or other well researched ideas like the momentum follow-through concept.
One of the many great lessons I’ve learned from Dr. Ken Long is that INTERMEDIATE-TERM momentum begets more INTERMEDIATE-TERM momentum. Building off of Ken’s excellent work, I researched half a dozen sources and found that 3 – 12 month momentum has a history of follow through. The chart at the top describes the general tendencies:
Does all of this mean to “bet the farm” on a strong March? Of course not. But unless, and until, the market gives us some additional indications of discontent, pullbacks are still to be bought. We might not have to wait long . . . there is much negativity among pundits right now and we are due for some profit-taking after this strong market run.
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