Stocks to Play After the Latest S&P 500 Rally

It is often better to own the worst 50 stocks during the rally than the best 50

Senior Quantitative Analyst
Nov 17, 2021 at 8:00 AM
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The S&P 500 Index (SPX) is on a heater, gaining nearly 5% in the last month. However, that does not mean all stocks performed well. Disney (DIS), Twitter (TWTR) and PayPal (PYPL) all lost at least 10% during that period. A bear could make the point that if these stocks did that awful during a buying spree, then it is a sign of underlying weakness in the company. Conversely, a bull can argue these stocks will play catch up moving forward, so you can expect major outperformance in the future.

This week, I will look at how individual stocks tend to do based on their performance during a broad market rally. Each stock has its own individual situation, so there is no correct answer when debating a particular company. But we can see which side of the debate has the numbers on its side.

Best 50 VS Worst 50

For my analysis, I considered current SPX stocks and looked at past one-month rallies. I looked at returns from the 15th off the month to the 15th of the following month, so that it was timely. Each month, I found the best 50 stocks and compared them to the worst 50 stocks, as well as the ones in between.

There was a stock rally from March 15 through April 15 of this year when the SPX gained just over 5%. The table below shows how these stocks performed based on how they did during the rally. The best 50 stocks averaged a slight loss over the following month, with exactly half beating the SPX. The stocks that did the worst during the rally averaged a gain  of 3.84% over the next month, with 62% of those beating the SPX.

I already expected to see mean reversion in this study, meaning the laggards would tend to outperform going forward. However, let’s look at the next rally.

IotW Nov16 Chart 1

This time, I am looking at the rally from mid-June to mid-July 2020. In this case, you get the opposite result. The best stocks during the rally continued to be the best stocks over the next month, gaining an average of 8.76% over the next month, with 66% beating the SPX. This was a much better outcome than the 50 worst stocks during the rally, which averaged a 3.84% return over the next month, with not even half of them beating the broad-market index.

IotW Nov16 Chart 2

Finally, I went back to 2016 and found all times the SPX gained at least 4.5% over the course of a month. This gives a more robust sample size than looking at only one month. It has been better to own the worst 50 stocks during the rally than the best 50. The worst 50 stocks during the rally averaged a 3% return during the next month, with 58% of them positive, and 47% beating the SPX. The best stocks during the rally averaged a return of 1.46% over the next month, with 48% of them positive, and 39% beating the SPX.

The numbers indicate a tendency toward mean reversion. This does mean you should ignore the stocks that have done well over the past month. It simply means that if you are making a case for these stocks, you might want to have an extra driver or two.

IotW Nov16 Chart 3

Underperforming Stocks

Finally, below is a list of stocks that have underperformed over the past month. These are stocks that could benefit from the mean reversion tendency that I discussed above. If you were on the fence about buying any of these, this is one more reason to pull the trigger.

IotW Nov16 Chart 4


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