Testing A Theory: Stocks Rising During a Broad-Market Selloff

Testing the performance of stocks that gained while the SPX fell

Senior Quantitative Analyst
Mar 17, 2021 at 1:54 PM
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I’ve heard many times that it’s a good sign when a stock goes higher on a day that the broader market sells off. The theory is that it indicates underlying strength in the stock and/or excess buying pressure. I decided to test this concept and put some hard numbers behind it. If the numbers support the theory, we can scan for these occurrences as one more driver for a bullish stock play. If the numbers turn out the other way, we might ignore these occurrences or at least give them very little weight.

Stocks Gaining on Monthly Down Days 

For this study, I went back five years and looked at stocks on the S&P 500 Index (SPX). For every month, I found the down days on the SPX and then put the stocks into three brackets depending on how they performed on the down days. I broke down the stock by:

  1. Stocks that were up on most of the SPX’s down days in the month and averaged a positive return on those days.
  2. Stocks that were up on most of the SPX’s down days in the month but still averaged a loss overall on those days.
  3. Stocks that were down on the majority of SPX down days in a month.

After separating the stocks in these three brackets, I summarized the returns over the next month of trading.

The table below shows the results of my study. If it’s a bullish sign for a stock to perform well on market down days, then you would expect the returns in the top row to be better than the other rows. You would expect the bottom row to perform the worst. That is the opposite of what happened.

Stocks that were positive on at least half of the SPX down days in a month averaged a 0.59% gain the next month with 56% of the returns positive. Stocks that were down on the majority of SPX down days in a month, as you would expect, gained an average of 1.62% with 59% of the returns positive. Additionally, the stocks that performed best during the monthly down days beat the SPX the next month just 47% of the time. The stocks that were down on those market down days beat the index 51% of the time the next month.

IotWChart0316

Implications  

As is often the case, the consensus does not hold up when you put hard numbers behind it. If you hear a pundit say it’s a good sign that a stock is holding up on a particular down day, know that the numbers do not bear that out. According to my method above, those stocks tend to perform worse going forward than the stocks down on that day. Perhaps it’s the broad market down days when climactic buying occurs on certain stocks as the most eager buyers jump at what they think is an advantageous buying opportunity. That’s the best theory I can come up with as of now.

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