Beware the month of April

Small cap stocks scratched and clawed their way to the second highest weekly close on record last week. The overall advance wasn’t spectacular – about 0.7% - but the ability to crack modest short-term resistance in the Russell 2000 along the 815.00 zone was important to avoid exhaustion warnings.

In general, the measured advance back toward those record February highs is a positive sign. Dramatic volatility often signals a major turning point, so a wacky and sudden assault on those highs accompanied by breathtaking collapses would actually be more worrisome than a gradual buildup of momentum back toward a test of the February peak.

It should be noted that the topping formation in February (double top on weekly charts) was a fairly powerful signal and should be respected. The most likely scenario would be a test of those highs that requires several attempts, while a less likely situation would be a complete explosion through that top. If we climb back toward those February highs the next couple of weeks, how we trade there will be critical to forming chart patterns and drawing a forecast for the summer.

Even though the Russell 2000 is in the midst of a 4-year-plus bull market run, the April seasonal has not been that kind to the market. In fact, the Russell 2000 has not been higher during the month of April since 2003, when the market was pulling out of a major bottoming formation. Even during the bull run, the Russell 2000 was down 6% in April 2005, and down 5% in April 2004. A 5% decline this April in the shadow of February’s record high would be an ominous signal, so the stakes remain high in here, especially for those carrying short-term positions in small stocks. If you have long-term profits in hand, the overall chart formation is still trending higher and there is no reason yet to exit.