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'Tis the Season

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'Tis the season when bears sometimes frolic and become jolly. Tax season, that is.

Steve Northwood, treasury and Fed analyst with an online market-related service, recently mentioned an anomaly that tends to occur as in the days leading up to April 15-17. Individual tax payers could be shelling out up to $180 billion in taxes as the April 15 deadline looms, he says. Some may liquidate treasury or equity positions to raise that cash, resulting in downward pressure on the markets.

Market guru Martin J. Pring's research might show a slightly different timing for that downward pressure. In TECHNICAL ANALYSIS EXPLAINED, he posts research that shows market performance for each day of the year during the period of May 1952-April 1971. April's chart does show a dip, but a dip that occurs near or after April 15 rather than before that date. So should we traders count on any seasonal but fleeting weakness this April?

The SPX chart for April 2005 certain displays weakness into the April 15-17 period.

Annotated Daily Chart for the SPX:

A similar pattern occurred in 2004.

Annotated Daily Chart of the SPX:

The pattern did not play out the same way in 2003, however.

Annotated Daily Chart of the SPX:

Was it possible that another seasonal pattern interfered with the usual down period leading into April 15-17? With Easter on April 20 in 2003, but outside that April 12-20 period on the other two years, that possibility exists. One study, with results published in Pring's book, shows that the Thursday before Good Friday sees average returns in excess of 0.25 percent. That holiday-shortened week leading into April 15-17 was also an option-expiration week, and reports at the time credited option expiration with providing a lift to the equities.

The previous year, 2002, produced a steep decline into April 12, a bounce instead of a decline during the April 12-April 17 period, and then a resumption of the decline. If the tax season produced a seasonal effect, the timing was skewed. Easter had been early that year, March 31, but April 15-19 were the days of that option expiration week. Trading patterns proved volatile, perhaps due to opex.

Easter occurred April 15 in 2001, and again the bullishness preceding a holiday seemed to have a stronger effect that any expected downturn due to tax payments to be made.

Annotated Daily Chart of the SPX, 2001

Perhaps those taking big stock market losses in 2000-2002 had no need to sell stocks or bonds to pay taxes in the April's of 2001, 2002 and 2003. The multitude of seasonal influences--holidays, opex weeks and tax season--that might work with or against each other makes it difficult to sort out which will be strongest at any one time. What is clear is that sometimes there is selling into the April 15-17 period, but sometimes there is not. Be aware of the possibility. However, the pattern does not appear trustworthy enough that I would advise traders to bank on it this year with automatic bearish entries at the close on April 12 this year.

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