The Stocks to Target After the Nasdaq Sell-Off

History suggests the Nasdaq could bounce back after the recent weakness

Senior Quantitative Analyst
Aug 1, 2018 at 6:50 AM
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Those of us keyed into the market daily are aware of a rotation that took place over the last few days of July. It seems Facebook’s (FB) earnings crash caused an exodus from tech stocks, which had been leading for most of the month. I thought looking into the past might give us an idea about what to expect from these stocks for the month of August. Should these stocks be avoided or is it a buying opportunity?

The Nasdaq's Late-Month Reversal

To mimic our current situation, I looked at past times the Nasdaq Composite (IXIC) was outperforming the S&P 500 Index (SPX) by at least 0.75% for the month. Then, the Nasdaq lost at least 1.5% over the remaining four days. There have been 11 other times this happened since the first occurrence in 1974. The table below shows how each index performed the next month.

Historically, the Nasdaq tended to bounce back strong. The next month the index is up an average of 2.37% on average, while the S&P 500 has declined an average of 0.82%. The Nasdaq was positive about 55% of the time after these rotation months, while the S&P 500 was positive just 36% of the time. Both indexes, however, were positive less often than usual when compared to other months. The main driver of the Nasdaq outperformance is that when the index does gain, it moves up a lot. When it is positive after a rotation month, it gains an average of almost 7%. Other months average a gain of 4.7% when positive for the Nasdaq.

spx today

The table below lists the individual occurrences. The last time we saw a rotation like this -- and the only time in the current bull market -- was last November. In that instance, both indexes were positive, but the S&P 500 was better than the Nasdaq. In six of the last seven occasions, the Nasdaq was positive the next month.

returns after market rotation

S&P 500 Stock Reversals

I also looked at how individual S&P 500 stocks performed in the month after a late-month reversal. I define a pullback as a stock that was higher and ranked in the top 15% of stocks for most of the month, but then ranked in the bottom 15% of stocks and was lower over the last four trading days of the month. I grouped stocks into pullbacks and by stocks reversing higher at the end of the month (simply opposite of the pullback definition) and then compared them to other stocks. The table below summarizes the returns.

Stocks that pulled back late in the month tended to rebound the next month. They averaged a gain of just over 1% with 56% of them positive. Just over half of them, though, beat the S&P 500 the next month.

The stocks that were heading lower but then spiked at the end of the month tended to outperform the following month. These stocks averaged a gain of 0.43% with less than half of the stocks positive and not even 46% of them beating the S&P 500.

spx stocks after reversal

Finally, here is a list of stocks that meet the criteria of pulling back this month. Based on the analysis above, there could be some buying opportunities in the list below.

stocks to buy

And, naturally, I’m also including this list of stocks that reversed higher over the past few days to close out July. Going by the numbers in the study above, less than half of these stocks will be positive.

stocks to sell


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