Sell In April And Go Away?

Sell signals flashing on the midcap and small-cap indices

By Sam Collins, InvestorPlace Chief Technical Analyst

New York, Apr.3, swing trading .- Health care stocks led other sectors as the Dow Jones Industrial Average and the S&P 500 rose to new closing highs. The health care group’s strength resulted from the announcement of new government rates that will bring significantly more revenue to companies running Medicare Advantage plans.

The sector’s advance was led by Humana (NYSE:HUM), up 5.5%, UnitedHealth Group (NYSE:UNH), up 4.7%, and DaVita HealthCare (NYSE:DVA), up 6.1%. The group was already the best-performing sector of the year, up 17%, despite generally being considered a more “defensive” play.

At Tuesday’s close, the Dow had gained 89 points at 14,662, the S&P 500 rose 8 points to 1,570, and the Nasdaq was up 16 points at 3,255. The NYSE traded 639 million shares and the Nasdaq crossed 381 million. On the Big Board, advancers and decliners were even, but on the Nasdaq, decliners led by 1.25-to-1.

While the big-cap stocks of the Dow 30 and other major indices were making new highs, the indices that are composed of midcap and small-cap stocks turned down Tuesday. And not only did they have a minus day, but both charts clearly flashed a sell signal from the important MACD internal indicator.

Click to Enlarge

The Russell 2000 small-cap index closed just above initial support at its 50-day moving average at 932, but broke its 20-day moving average (green line).

Click to Enlarge

The S&P 400 midcap index fared a bit better. It closed just above its 20-day moving average. Its next support line is at 1,124.

Conclusion: With public investors almost absent, the stock market is in the hands of institutional traders. These fellows make their living trading stocks or buying for the long term, and they are savvy. It was clear Tuesday that the “smart money” wants to be in stocks but is not willing to take huge risks. Thus, the leading sector was health care, a defensive group of stocks, and the leading indices were the Dow 30 blue chips and the S&P 500.

This is both good and bad news for the bulls. Good news because quality is still leading the market, telling us that following a correction the market will most likely turn higher. Bad news because, without the leadership of the midcaps and small caps, most stocks look like they are headed for a near-term consolidation or mild correction.

April may turn out to be a gaining month, but don’t count on it — especially for small and midcap stocks. This year may be the one when, for less-than-investment-quality stocks, “sell in April and go away” becomes more profitable than selling in May. ...