Most everyone knows that Uncle Sam is waiting anxiously for April 15th to arrive. Don't look now, but it's almost here! Even if you decide to extend the filing date for your tax return, any balance due must be paid now. The payment generally cannot be extended. So that begs the question - does the potential tax obligation on April 15th cause stock market selling on the days leading up to it? The answer is yes....and no.
In my Can You Time The Stock Market blog article, I pointed out that the S&P 500 historically has performed extremely well from the 11th to the 18th of all calendar months. It's due to the anticipation of, then the actual receipt of, money flows mid-month. But April is a bit different and doesn't seem to blindly follow that general trend. The annualized returns of April 13th and 14th over the past 65 years on the S&P 500 are (33.77%) and (10.07%), respectively. The good news, though, is that these two days move higher more often than they move lower. But when they do go down, they sometimes REALLY go down. Take a look at what happened in 2000:
April 14th, 2000 was one of the worst days in stock market history. We do need to keep in mind that this is a sample of exactly one year - 2000. So let's not get carried away making too many assumptions off of one poor year. But if you think about it, the year 2000 was following a stellar S&P 500 year in 1999 in which there were probably a lot of taxpayers with hefty capital gains. The NASDAQ had risen an astonishing 85% in 1999. It's not unreasonable to think that the stock market could be swayed by tax time, especially if the prior year resulted in stock market gains. The annualized returns for April 13th and 14th on the NASDAQ since 1971 are (55.78%) and (78.45%), respectively. Because the stock market goes higher in a year more often than it goes lower, it would make sense that investors and traders might need to sell stocks to fund their tax obligation leading up to April 15th, right?
The interesting part is that following bad years of stock market performance, there was still a bias of selling on April 13th and 14th. For instance, 2008 was one of the worst stock market years on record with the NASDAQ tumbling 40.54%. Yet April 14th, 2009 saw the NASDAQ fall another 1.67%. Check it out:
It really doesn't look to be a bad thing technically on this chart and maybe the overall selling on the 13th and 14th of April is simply a coincidence and completely overblown. But as a trader, I like to manage my risk as best I can. So the 13th and 14th of April represents a time to relax and let others battle.
Here's a bit of historical good news. Once we get past April 14th, the stock market turns in astoundingly positive historical results. On the NASDAQ, for instance, the annualized returns from April 15th to April 18th are as follows:
April 15th: +22.25%
April 16th: +89.84%
April 17th: +95.45%
April 18th: +142.20%
So if all goes according to historical plan, better opportunities on the long side might present themselves by Wednesday, April 15th. We'll see.
Happy trading!
Tom
