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CHAPEL HILL, N.C. (MarketWatch) — If the stock market rises over the next two weeks, you might want to thank the IRS.
Of course, thanking the Internal Revenue Service on April 15 will be the last thing on your mind as you send off a check for the amount you owe the government. But the stock market historically has been stronger than average during the first half of April, and some analysts think it’s because of tax bills coming due.
Consider: Over the past six decades, the Dow Jones Industrial Average DJIA, -0.22% has produced an average gain of 1.2% in the first half of April. The comparable average for the other 11 months is 0.2%. This difference is significant at the 95% confidence level that statisticians often use to determine if a pattern is genuine. (See accompanying chart. The averages plotted there reflect data back to 1955, which is when April 15 became the tax-filing deadline.)
Why would early April strength have anything to do with the days before taxes are due? Several advisers I monitor have theorized over the years that it’s because the federal government has a vested interest in keeping the economy as liquid as possible to facilitate the payment of taxes that are owed, and that some of this extra liquidity finds its way into the stock market.
Note carefully that, even if the future is like the past, which is always a big “if” in this business, this first-half-of-April effect does not guarantee that the market will rise over the next two weeks. It instead represents an increase in probabilities.
Think of it the way you would if you were a card counter in blackjack: If the cards remaining in the dealer’s deck were rich in favorable cards, you would increase the size of your bet — and vice versa.
The next two weeks represent an increased probability of a rising market. The odds are probably not high enough to overcome round-trip transactions costs. But if you were about to sell some of your equity positions anyway, you might want to wait a couple of weeks before doing so. And if you were otherwise planning to invest more money in equities, you might want to do so now rather than wait.
For more information, including descriptions of the Hulbert Sentiment Indices, go to www.hulbertratings.com or email firstname.lastname@example.org.