You’ve probably heard axioms like “Sell in May and go away,” the “January Effect” and the “January Barometer.” Also, you may have heard that August/September/October tend to be the months when significant stock market crashes or selloffs occur.
These long-held beliefs and historical trends tend to have some basis behind them, but do need to be updated and tested to see how and if they are still working. After all, if everyone knows about a trend, it becomes more likely that it will occur earlier or not at all.
Some people also put faith in market trends based on things like presidential election years, presidential administration cycles and Fed rate hike cycles ̶ as well as more obscure (and questionable) things such as the Super Bowl indicator and moon cycles.
Calendar trends particularly become significant when there is a logical basis to a trend, as opposed to just some random time period showing gains or losses.
There is one specific period of the year when we know there will be additional money flowing into stocks.
That is around Tax Day (April 15), when millions of people file their taxes at the last minute . . . and fund their IRAs.
Estimates are that 15% to 33% of all tax filers wait until the last minute. And a significant number fund their IRAs at that time in order to receive the tax deduction.
The Tax Day Market Trend
I analyzed stock market data in April over the past five, 10 and 20 years to see if any trends emerge. The results show a specific short-term time frame where you can likely capture some gains . . . the tax day market trend.
First of all, April is the most bullish month overall for the S&P 500 Index (SPY), in terms of probability of being higher at month-end.
Over the past 20 years, the market moved higher in April 75% of the time. Over the past 10 years, it was 90%. And over the past five years, it was 80%. In short, there is a high probability of the market rallying over the month of April.
It must be noted that the size of the April move has lessened in recent years, gaining only 0.3% on average over the past five years, as opposed to 2.6% over the past 10 years and 2% over the past 20 years. This is largely due to the huge market rally in 2009, when the S&P 500 Index had the infamous panic “666” market bottom in March, then began its huge rebound rally in April.
This April (so far) is actually a down one, with the S&P 500 lower very slightly at -0.16%. So, this tells us that there may be some sort of rebound coming the rest of the month that would push it to positive territory.
A Winning Short-Term Trade
Zeroing in on the market performance and tax day market trends, there are some interesting (and bullish) results over the multiple time frames examined. This holds true with the theory of the large amount of IRA contributions causing increased buying volume in the markets. Remember, inflows into many stock market assets are often required to be immediately allocated.
Basically, buying the close of the market on Tax Day (usually April 15) and selling it the close of the next trading day has been a strong winning short-term trade on average.
The average daily gain for the S&P 500 on this one-day trade has been 0.66% over 20 years, 0.30% over 10 years and 0.23% over the past five years. And the probability of that day being an “up” day is 70%, 70% and 80% respectively.
As a side note, the April 14 to April 16 time period also tends to be bullish (buying the close the day before tax returns are due, selling it the day after).
While 0.30% in a day may not sound like much, that is actually about 7 points on the S&P 500 Index ̶ and equates to an annualized gain of around 75% over the average 252 trading days in a year.
Overall, these results show a nice edge to have in your favor on a short-term trade. The tax day market trend is one that can be leveraged for bigger profits through using SPY options.