Why I think our market is poised to race higher over the next 2 months

This is the time to buy the market as I believe we have a pretty clear road to run higher over the next few months to May now that we’ve gotten the reporting season out of the way.

In case you weren’t looking, the February reporting season was upbeat and it’s given me the confidence to believe that the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is heading higher (click here to see what the key themes were from the reporting season)!

What’s more, history is on our side. Bell Potter’s trading desk has looked at the last 19 years and has found that March and April tend to be the strongest back-to-back months to be “long” the market. In other words, short-sellers might want to take a break and return later in the year.

The broker found that the top 200 stock benchmark has delivered gains of 0.98% in March and 1.56% in April on average. The 2.54% may not sound like a big deal to you, but it is – particularly if you consider that the average monthly movement for the index is just 0.38%.

Further, gains have come in two-thirds of the time over the long period that spans nearly two decades.

February has also tended to be a good month on average. If you remember this time last year, the S&P/ASX 200 jumped 1.62% in February, although the probability for gains in the month is a little lower at 61% of the time since 2000 with an average gain 0.58%.

Not this year though, no thanks to the sharp sell-off at the start of February that was triggered by a spike in bond yields. The top 200 index is marginally down by 0.36% this year.

All the more reason to go long now. The underperformance was not due to poor profit results or other problems with the Australian economy and I think history is going to repeat this year in March and April.

Buying the index heavyweights, like BHP Billion Limited (ASX: BHP), Commonwealth Bank of Australia (ASX: CBA) and CSL Limited (ASX: CSL), is a good way to gain exposure to gains but you can probably do a little better by being overweight on blue-chip stocks that have delivered strong profits and outlook statements last month.

Stocks that have outperformed the market on the day of their profit announcements have typically continued to rally ahead of the market over the short-term.

Some of the reporting season heroes include CSLQantas Airways Limited (ASX: QAN), BlueScope Steel Limited (ASX: BSL) Webjet Limited (ASX: WEB) and A2 Milk Company Ltd (ASX: A2M).

However, the month of May has more often than not been a seasonally weak period for our market. That’s how the saying “sell in May, go away” came to pass.

Long-term investors shouldn’t be too concerned about this as I believe 2018 will be a good year for equities, although those who focus on timing the market might want to keep this in mind.

But some of the best gains on our market may come from small caps, and the experts at the Motley Fool are particularly bullish about the outlook on one sector.

Click on the link below to find out what this sector is and the stocks that are best placed to ride this investment thematic.

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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended Webjet Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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