AAII Investor Update: Use April Strength to Rebalance?
Thursday, March 31, 2011
Charles Rotblut, CFA
AAII Journal Editor

AAII Resources

April AAII Journal
The new issue features four fundamental tests for stocks, how to check out a financial advisor, and more.

AAII Tax Guide
We provide rates and information that can help you assess your tax situation.

Discussion Boards
What is your allocation strategy?

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April is the second-best month for stocks, trailing only December in terms of average gains for the S&P 500. April also marks the end of the best six-month period for stocks.

Sam Stovall at Standard & Poor’s calculates that the calendar’s fourth month has produced an average monthly gain of 1.6% for the S&P 500 since 1945. Large-caps have risen 68% of the time. Jeffrey Hirsch, author of the Stock Trader’s Almanac, has found only one down pre-election April since 1951.

After April, the market’s batting average dips. The Dow Jones industrial average has only risen by an average of 0.4% between the start of May and the end of October. June and September have comparatively bad reputations, according to Stovall, averaging flat to slightly negative performance for the S&P 500.

Does this mean you should start looking to lock in some profits? Not unless it has been longer than 12 months since you last rebalanced your portfolio (or you own stocks you were planning on selling anyway). The second quarter of the third of year of a presidential term has historically been a good time to own stocks. The aggregate economic data points to a continuing recovery, even if it is an uneven recovery. First-quarter earnings for the S&P 500 should be 13.3% higher than they were a year ago, according to Thomson Reuters. Finally, the S&P 500 still looks fairly cheap with a forward-looking price-earnings ratio of 13.4.

Not all is rosy, however. Congress is nearing a deadline for reaching a budget with the threat of government shutdown once again looming. The Federal Reserve’s program of buying Treasury bonds (“QE2”) is scheduled to end in June. Gas and food prices are rising. Unrest has spread across the Middle East. The European Union could raise interest rates next week. Then there is the tragedy in Japan and the ongoing issues with the nuclear reactors.

Hirsch recommends adopting a more conservative position for the period of May through October. He suggests either moving into cash and bonds or, for more active traders, tightening stop limits and using put options.

I’m not an advocate of market timing strategies, but I strongly believe that you should rebalance your portfolio on a regular basis. As I show in the new April AAII Journal, rebalancing your portfolio once a year increases performance and lowers volatility, a win-win proposition. It is more important that you rebalance your portfolio at approximately the same time every year than fret about how stocks have historically fared during a given month.

There is a middle ground—rebalance twice a year. Research from Vanguard found that semiannual rebalancing can strike a reasonable balance between risk control and cost minimization. The key is to make changes only when allocations are 5% or more away from target (e.g., your stock holdings account for 56% of your portfolio when they should account for 50%).

Following Vanguard’s strategy in combination with Hirsh’s would have you considering whether rebalancing is warranted at the end of every April and every October. Doing so would allow you to reduce any excess stock allocations at the end of the best six-month period and increase them at the end of the worst six-month period, while still sticking to your long-term portfolio goals. The intent of this methodology is to adjust your stock holdings back to your long-term allocation targets, not to increase or decrease them beyond those targets. (If you need help determining what a proper target for your portfolio is, see our Asset Allocation Models).

I want to reiterate that the most important step you can take is to review your portfolio allocations and rebalance your holdings as warranted at approximately the same time every year, regardless of what month it is. The best and worst six months is a strategy you can overlay upon your rebalancing process, but only after you commit to regularly reviewing your allocations.

What is your allocation strategy? Do you rebalance regularly and, if so, is there a particular time of year or allocation thresholds that you use? Tell us on the AAII Discussion Boards.

April AAII Journal Now Online

The April issue of the AAII Journal can now be read on AAII.com. (Print copies are in the mail.)

This month’s issue features four fundamental tests for analyzing a stock. Michael Thomsett, an author of several investing books, gives specific indicators to look at and explains why you should consider historical trends when evaluating a company’s fundamental strength.

Those of you who want the assistance of a financial professional will want to read Chuck Jaffe’s article, How to Check Out a Financial Advisor. Jaffe, a columnist with MarketWatch, provides specific questions to ask and lists regulatory and government resources to use as part of a background check.

I should also point out that the new issue includes the latest Shadow Stock Portfolio Update from AAII Founder James Cloonan.

Read the April AAII Journal.

Taxes Are Due April 18

You will have three extra days to finish your taxes this year, with a filing deadline of April 18. If you have to file, our Annual Tax Guide may be of help. Each year, we provide rates and other information to help you assess your tax situation and plan for the future.

If you use software programs, such as TurboTax, or third-party guides, be sure to check for updates. The late passage of the new tax law and the logistics of physically producing tax aids made updates a necessity this year.


Just three S&P 500 members will report next week. Bed, Bath & Beyond (BBBY) and Monsanto (MON) will release their results on Wednesday; Constellation Brands (STZ) is scheduled for Thursday.

The economic calendar is light as well. Tuesday will feature the March ISM services survey and the minutes from the March Federal Reserve meeting.  February wholesale trade data will be published on Friday.

Potentially making up for the low number of economic releases will be public appearances by several Federal Reserve officials. Atlanta Federal Reserve Bank President Dennis Lockhart will host a conference at which Federal Reserve Chairman Ben Bernanke (Monday) and Philadelphia Federal Reserve Bank President Charles Plosser (Tuesday) will appear. Lockhart also has separate speaking engagements on Monday and Friday. Minneapolis Federal Reserve Bank President Narayana Kocherlakota will speak on Tuesday. Richmond Federal Reserve Bank President Jeffrey Lacker will speak on Thursday.


Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 41.8%, up 4.1 points
  Neutral: 27.1%, down 0.2 points
  Bearish: 31.1%, down 3.9 points

Long-term averages:
  Bullish: 39%
  Neutral: 31%
  Bearish: 30%

Take the AAII Sentiment Survey »

Bullish sentiment improved 4.1 percentage points to 41.8% in the latest AAII Sentiment Survey. This is the first time optimism that stock prices will rise over the next six months has been above its historical average of 39% since February 17, 2011.

Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, was down a very modest 0.2 percentage points at 27.1%. The historical average is 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, declined 3.9 percentage points to 31.1%. This is a six-week low for pessimism. The historical average is 30%.

The S&P 500’s rebound over the past seven days has renewed investors’ optimism about the direction of stock prices. It is a cautious optimism, however, with bearish sentiment staying above its historical average for sixth consecutive week.

This week’s special question asked AAII members at what point rising oil prices would have them worried about a potential slowing of economic growth. The majority of respondents fell into one of three groups. The first thought oil was already having a negative impact. The second said if crude stayed at $120 per barrel or higher, economic growth would be curtailed. The third said oil would have to rise above the $140 - $150 per barrel range to make them worried.

Here is a sampling of the responses:

  • “I am somewhat concerned at these levels; oil at $125 per barrel or more would turn my concern into real worry.”
  • “A price per barrel above $120 for a significant period of time would worry me and force me to re-examine my entire portfolio.”
  • “I think the more common barometer is the price of a gallon of gas. I believe the breaking point is $4.”
  • “At current levels, I am not concerned. If oil got to $140 per barrel, then I think it would be a headwind. Also, if the price of gas rose above $4 a gallon.”
  • “The current price of oil will slow growth as it impacts discretionary spending by consumers. Automobiles do not run on iPads.”

Are you bullish, bearish or neutral? Take the AAII Sentiment Survey and tell us.