How Stocks Behave During During a Market Bounce

Traders should still proceed with caution before betting on a rebound for the oil sector

Senior Quantitative Analyst
Mar 11, 2020 at 6:30 AM
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It might be premature, but Tuesday’s early morning spike made me hopeful. Besides, you need to be quick to make money in trading. I became curious what stocks should be targeted during a V-bottom. As of now, the recent pullback is similar in magnitude to the one we experienced in late 2018. From late September of that year until the market bottom on Christmas Eve, the S&P 500 Index (SPX) fell 19.8% on a closing basis. The recent decline was 18.9% off its Feb. 19  high as of Monday’s close.

This week I’ll examine the 2018 fall to see how individual stocks performed during the decline and how those stocks did over the next month during the strong rebound. I am fully aware that simply by conducting this study I risk jinxing the stock market bounce.

The Numbers

For this study, I put the current S&P 500 stocks into 10 brackets based on how they performed during the decline. Bracket one consists of the 50 stocks that did the absolute worst from late September 2018 through Christmas Eve of that year. Those stocks, as you can see in the table below, averaged a loss of 40% during the selloff. The next 50 worst stocks averaged a 31% loss and so on until the best 50 stocks during that time frame averaged a small increase of about 1.5%.

SP500 Stocks During Decline IotW

Using the same stocks in each bracket, I found how those stocks performed over the next month of trading. The bounce was very strong with the S&P 500 gaining 12.4% over that month. The table below summarizes the returns for each bracket.

This is what I expected, and the pattern is undeniable. The stocks which did the worst during the decline were the best ones to own at the market low point. The worst 50 stocks during the decline averaged a gain of more than 20% over the next month. All 50 were positive and 92% of them beat the S&P 500, which as I mentioned already, gained 12%.

Brackets four through seven are almost indistinguishable from each other as they all average a little over 13% returns, with between 52% and 62% of the stock positive.

The best stocks to own during the decline averaged a 7% return over the next month. That’s a good one-month return but it underperformed the S&P 500 by a decent amount. Furthermore, only 8% of those stocks beat the S&P 500.

SP500 Stocks Rebound Mar 10 IotW

Finally, below is a list of the 25 worst performing stocks in the S&P 500 from the all-time high on Feb. 19 through Monday, March 9. Oil stocks dominate the list. Oil got crushed during the decline when Saudi Arabia said it would lower prices and increase production. If you’re targeting these stocks to play a bounce, it might not be wise to be so heavy in one sector. Therefore, I have a second table below that shows the 25 worst S&P 500 stocks during the decline, but I didn’t consider the oil-related stocks.

Worst Stock During Decline Mar 10 Iotw

Worst Stock During Decline No Oil Mar 10 IOTW

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