Here's How To Profit From April's Best Stock Market.

In order to win in the market, you need to go against the consensus and against what people are feeling

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A number of contrarians are predicting a very difficult month for the U.S. stock market in April, according to the Financial Times.

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According to the narrative that is widely spread in the media, April is the most successful month of the year for the stock market. Depending on how you view the data, you might find that this false narrative is either highly misleading or totally incorrect. This false narrative has the effect of creating the "slope of hope" opposite the "Wall of Worry" that markets are always climbing.

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This narrative can be illustrated by a communication that Jeff Hirsch, editor of the Stock Trader's Almanac, sent to clients recently. According to him, April has been the best performing DJIA month since 1950. Or to take Matthew Carr's example, the editor of the First Bar with Matthew Carr website, who wrote this: "April is the highest performing month of the year for the DJIA since 1950." Based on his analysis of the past three decades, April has the highest probability of being successful than any other month. Considering the fact that April is this year's best month for stocks, Carr refers to the month as an "awesome month," concluding that this is the best month of the year for stocks.

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In no way am I trying to pick on Hirsch and Carr, but they're not alone among the newsletter editors I am watching in believing the seasonal trends favor a strong April. Although they may focus on a certain amount of historical data while overlooking other aspects, these newsletter editors tend to ignore some historical data. This is a statistical no-no, so it's a good idea to focus on all available data.

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The average number of days in April

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In the case of the Dow Jones Industrial Average, it is unexceptional when looking back at the data for as long as it can be analyzed. The average return for April has been the same since 1896 when it was created. In the 95% confidence level that statisticians use to determine if a pattern is genuine, the average return for April has been the same for the other 11 months. Additionally, there is a 60% probability that the stock market will be successful in April, but that is less than 58% for the other 11 months of the year.

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When investors based their bullishness on historical arguments which are so flimsy, then they are clearly motivated by sentiments rather than fundamentals. The contrarian believes it is especially advantageous when investors ignore the obvious holes in the arguments that they are putting forward that it would be wise for them to bet against the consensus.

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In order to measure consensus among a variety of short-term stock market timers, I use a sample of the average level of recommended equity exposure. According to the Hulbert Nasdaq Newsletter Sentiment Index (HNNSI), the average price of this indicator is found among timers who focus primarily on the Nasdaq Composite. Due to Nasdaq-focused timers' quickness to change their recommended exposure levels whenever it seems as though Wall Street is getting a mood shift, the HNNSI is by far my most sensitive indicator of market sentiment out there.

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In recent weeks, the HNNSI has soared dramatically, and is now within shouting distance of being in the top decile of the daily reading distribution since 2000, as you can see from the chart. As you can see in the chart, it is shaded to indicate excessive bullishness; I have used it as an indicator in prior columns to indicate excessive bullishness. There are compelling reasons for believing that the U.S. stock market will struggle in the next few weeks despite its current above-average level. The contrarian odds of April being a down month aren't as strong as they would be if the HNNSI were in that highest decile, but its current above-average level does suggest that it will experience difficulty in the near future.

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In my opinion, there aren't any indications that April will be an "Awesome April." There is more than one possibility.

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I am pleased to inform you that my firm tracks the average exposure levels of market timers across a number of arenas, including the stock market. Also, my firm creates comparable indices that track the broad U.S. stock market (represented by the S&P 500 or the Dow), the gold market, and the bond market in the U.S.. Currently, all of these arenas are reflected in the chart below, which summarizes where the timers currently stand.

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