Indicator of the Week: Why the S&P's Correction Has a Silver Lining

The S&P 500 Index (SPX) recently notched its fourth 10% pullback since the 2008 crash

by Rocky White

Published on Sep 2, 2015 at 8:03 AM

The S&P 500 Index (SPX) recently experienced its fourth 10% pullback -- typically called a "correction" -- since the 2008 crash. The previous three pullbacks of this magnitude proved to be great buying opportunities. Whether this one is over or not remains to be seen. For this article, I'm going to work under the assumption that we bottomed last Monday. In that case, which stocks might we see perform the best going forward?

This week, I'll look at previous corrections and compare stocks that pulled back the most to those that pulled back the least. Finally, I'll find some stocks that could do well going forward. 

Stocks After the Correction: The previous three S&P corrections bottomed in July 2010, October 2011, and June 2012. The most recent pullback bottomed last Monday, Aug. 24. However, after yesterday, maybe we're speaking too soon to assume that was the bottom?

To get the data below, I looked at current S&P 500 stocks, found the 50 best and worst during the pullbacks, and looked at how they performed going forward once the bottom was reached. As you can see -- and as you might expect -- the stocks that did the worst during the correction significantly outperformed the other stocks going forward. This is mostly a function of those stocks being the most volatile, and, as a result, falling the fastest during the pullback and rising the most in the ensuing rally. Still, the outperformance is quite significant.

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Underperformers and the Current Pullback: After the analysis above I decided to look at stocks that have pulled back the most during the current correction. The majority of them were stocks that were already in a downtrend beforehand. I wondered how the securities that dropped the most -- but were still positive over the past 52 weeks -- during the correction. Out of the 150 worst performers, 42 of them were positive over the past year, even after the pullback. 

The table below shows how those stocks performed over the next month and six months. The second table shows the rest of the worst performers -- or those that suffered the most and were down over the past 52 weeks. Over the next six months, those stocks that were positive over the previous 52 weeks even after the pullback outperformed the already impressive returns of those that were negative. They averaged a 47% return over the next six months, with 98% of them positive!

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After this recent correction, only three stocks met the criteria of being among the 50 worst performers during the pullback, but positive over the previous 52 weeks. Those stocks are listed below. If the bottom is, in fact, in place, then according to the analysis above, these stocks should do very well.   

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