20 Stocks With Short-Term Spike Potential

Understanding how stocks perform after huge rallies

Senior Quantitative Analyst
Jun 17, 2020 at 8:10 AM
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Stocks have been on a tear since the worst of the coronavirus market crash. This week, I am looking at how the S&P 500 Index (SPX) has performed after huge rallies like the current one we're currently in. Then, for those who focus more on individual stocks, I will look at recent market rallies and see how stocks have performed based on whether they participated in the rally. 

Three-Month Rallies of 20%

The SPX has gained over 20% over the past three months. Frenetic rallies like this in such a short period of time are rare, with just one prior occurrence since 1950. The table below shows the occurrences I am studying.

The last time this occurred was in 2009, as stocks recovered from the financial crisis. It happened in the middle of the year, and then again later that year. It was a good time to buy stocks. Eyeballing these returns, I see zero negative returns in the six-month column and a lot of double-digit returns at one year. It sure looks like a bullish signal.

The table below summarizes the returns above, while the table directly under it shows typical returns for the SPX since 1963, when the first signal occurred. The returns after these rallies have been impressive. The S&P 500 averages a double-digit return just six months after the signals, with all 12 of them positive. The short-term returns are also extremely bullish, with the average return at those time frames three times higher than normal.

Individual Stocks 

Most traders focus on individual stocks though, rather than just the broad market. The exercise below will give us a list of stocks to keep an eye on for a short-term trade. I decided to drill down to individual stock returns after the S&P 500 rally off the 2009 low. If you look at the first table in this article, I am using the 5/28/2009 data-point. I used this signal rather than the most recent one because I believe it better represents our current environment, as it is closer to the market crash.

I used current S&P 500 stocks and broke them into the best 50, the worst 50, and all the other ones based on return during the three-month rally. The table below summarizes the returns over the next month of trading. It shows stocks that underperformed during the big rally made up a lot of the ground over the next month of trading. The worst 50 stocks gained an average of more than 6% over the next month of trading. The best 50 stocks that month averaged a loss of more than one percent. Additionally, 82% of those stocks that underperformed during the rally beat the S&P 500 Index over the next month, while only 32% of the outperformers beat the index.

To get a stalking list of stocks, I found the 50 worst-performing S&P 500 stocks over the past three months. Based on the analysis above, these stocks could rally strong over the next month of trading compared to the rest of the market. After layering on some brokerage sentiment data, I figured the headwind of playing catch up, as well as upgrade potential from investors could make a strong combination for gains going forward. Specifically, I used data from Zacks to find stocks with at least ten analysts giving the stock a buy/hold/sell rating. Out of the 50 worst performers, I narrowed the list down to 20 stocks that had the lowest percentage of analyst buys. I consider this a good stalking list for stocks with potential for a fast short-term spike.


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