Outperformers During Declines Not Outperforming During Subsequent Recoveries

While it may actually seem like every stock has gone down since the S&P 500 peak on October 9th, some have actually risen. In fact, through Thursday's close, 99 S&P 500 stocks are actually up since the S&P 500 peaked. In the table below, we highlight the best and worst performing stocks in each S&P 500 Industry Group since 10/9/07. While most of the groups highlighted are down since the peak, within most of them there are some pockets of strength. For example, retailers are collectively down over 14%, but in that group GPS has actually risen 5%. On the other hand, there are some groups like Autos and Banks where there is no bright side. In these groups, even the best performing stocks are down.

Some investors believe that watching the stocks that hold up best during market declines give some clues as to who the leaders will be during the recovery. However, when we analyzed the two prior declines during this year, we found that stocks which outperformed on the way down show no significant out/underperformance during the subsequent rally.

Comments

[Donald E.L. Johnson]

This finding by Bespoke directly counter's Investor's Business Daily, which daily reminds traders during corrrections to watch the market leaders and compile watch lists from those leaders. IBD bases it's recommendations on research by it's parent, William O'Neil & Co.
I've always wondered about IBD's assertion.

[Aquater]

Johnson's comment is insightful. IBD, however, also is out of market right now. They have been in and out of market this year quite frequently and, since they never report their performance, it is hard to tell how much money their approach has made.
To be fair, they also recommend leaders that break out in the formation called cup and handle, which avoids stocks that just outperform during corrections and bear moves. Still, when the downturn is over and they are back in the market after a rally is confirmed, I guess some current outperformers will be included in the cup-and-handle breakouts.
IBD approach also always recommends selling any stock that goes down by eight per cent below purchase price. Overall, I am curious if there is any study of IBD's performance. AAII does have a screen for the O'Neal approach but it is an overly simplified version. IBD's approach, on the other hand, is overly complex and highly subjective. It also necessittes reading their paper daily! I've found it hard to follow their approach solely through their basic ideas and strategies because in the paper they always come out with hidden explanations not unlike how companies come out with earnings surprises.