The stock market is poised to generate its strongest returns of the year over the next four weeks, according to a Monday note from Fundstrat.
The investment research firm analyzed historical seasonal market data that suggests the S&P 500 could surge just over 4% in April to 4,275.
Specifically, Fundstrat’s Tom Lee and team based its analysis off of the first five trading days of the year being positive after negative returns in the year prior. That scenario is currently in play after a dismal 2022 generated a loss of nearly 20% for the S&P 500, combined with the first five trading days of 2023 seeing a swift 1.4% gain.
“We expect April to be the strongest month in 2023, mainly relying on the implied gains using our ‘Rule of 1st five days,” Lee said. “The Rule of 1st five days looks at years when S&P 500 gains >1.4% in 1st five days and is negative the prior year. This has happened seven times since 1950: 1958, 1963, 1967, 1975, 2003, 2012, and 2019.”
The win ratio for stocks in the month of April is 86% based on Lee’s first five trading day rule, and bolstering the case for more upside is the fact that investor positioning is caught offsides. That could serve as more fuel to sustain further gains if stocks continue to trend higher.
“Is S&P 500 exceeding 4,275 consistent with investor positioning today? Nope,” Lee said. “Bears are increasingly trapped as fundamental catalysts for stocks to decline have passed and equities have shown impressive resilience.”
Also supporting the case for more upside in stock prices is a signal that suggests the US banking crisis that started with the collapse of Silicon Valley Bank last month is nearing its end.
Lee cites the MOVE Index, which measures bond-market volatility and has fallen below the 150 level to 135. The breach of 150 comes after the index soared to its highest level since 2009, suggesting that for a moment, the bond market was teetering on the verge of a crisis while uncertainties surrounding Silicon Valley Bank remained high.
Also supporting the idea that the banking crisis has ended is the decline seen in the VIX to below 20, combined with data from the Fed that shows regional bank deposits have stabilized, according to Fundstrat.
As inflation continues to cool, the regional banking crisis nears its end, and interest rates stop soaring, bearish investors will turn their attention to first-quarter earnings as a potential catalyst to knock down the ongoing rally in the market.
But for now, Lee is remaining on the bullish side. “EPS estimates were supposed to tank, but have been leveling off,” Lee noted. First-quarter earnings are scheduled to begin with the banking sector on April 14.