When the S&P 500 Index (SPX) Index fell 2.4% on Monday, it was the first 2% fall in the index since January. Since 2010, there have been 12 other instances when the index got hit with such a steep decline, and it was the first 2% drop in at least three months (so I’m disregarding the 2% drops that occurred within three months of another one). The table below shows how the index performed over the next two weeks after those drops.
It shows a bit of underperformance going forward, with an average return of 0.23%, vs. a typical two-week return of 0.41%. What I’m interested in, however, is how do individual stocks perform going forward. Specifically, is it ideal to own the stocks that declined the most on the big down days going forward, (this is my theory) or do the stocks that held their own on those big down days do the best?
Using current S&P 500 stocks for each date that the SPX fell by at least 2% (and it being the first 2% drop in three months), I broke the stocks into three different groups based on how they performed on the big down day. The far left column, besides the date, are the stocks that performed the worst. Those were stocks that were down at least 2% worse than the S&P 500 (so if the index was down 2.5%, these are stocks down 4.5% or worse). The middle column includes stocks that were down the amount of the S&P plus or minus 2%. Finally, the right-most column shows stocks that beat the market on that down day by 2% or more.
For each date, I highlighted in green the best performing group of stocks. The last time there was a 2% drop and was the first one in at least three months was 10/10/2018. The best performing stocks on that day lost an average of 0.79% over the next two weeks. These stocks easily outperformed all others. Other stocks were down on average about 6% over those two weeks. The outperformers on the big down day outperformed the other two brackets in six of the 12 dates. The worst performers on that down day outperformed the other two brackets just twice. It looks like my original theory might be wrong. Instead of getting stocks regressing back to the mean, the outperformance on a big market down day could indicate underlying strength in those shares.
Here’s another table, but instead of looking at average return, it’s the percentage of stocks that were positive over the next two weeks. The last four occasions saw those best performing stocks were positive more often than the other two brackets. The outperformers did best by this metric in seven of 12 instances.
Finally, I looked at the percentage of stocks that beat the S&P 500 Index over the next two weeks. This metric isn’t as clear cut. The best performers on the big down day were most likely to beat the index going forward in five of the 12 instances. Three of the 12 instances saw the stocks that were beat down the most, beat the index most often.
There were 78 stocks that beat the S&P 500 by 2% or more on Monday. To save space, below is a list of some of those stocks. These were ones that had a decent return over the last year, or had a good sentiment setup based on some of our indicators. Based on the study above, these have the best chance of outperforming over the next two weeks.
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