Contrarian approach to charting

Analyzing whether stocks are rising or not while the broader market is falling actually shows the underlying strength

I’ve heard many times that if a stock goes up on a day when the broader market is selling, it’s a good sign. The theory is that it indicates the stock’s underlying strength and / or excessive buying pressure. I decided to test this concept and put some hard numbers behind it. If the numbers support the theory, we can look to these events as another driver of a bullish stock game. If the numbers are different, we can ignore these occurrences, or at least give them very little weight.

Stocks that gain on monthly days of default

For this study, I went back five years and looked at stocks on the S&P 500 Index (SPX). For each month I found the days of failure on the SPX and then put the stocks in three brackets based on how they performed on the days of failure. I have broken down the stock by:

  1. Stocks that had risen on most of the SPX default days in the month and averaged positive returns on those days.
  2. Stocks that had risen on most of the SPX’s days of failure in the month, but still posted an average loss overall on those days.
  3. Stocks that have fallen on most SPX days in a month.

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

The following table shows the results of my study. If it’s a bullish sign that a stock is doing well on market days, expect returns on the top row to be better than the other rows. You would expect the bottom row to do the worst. That’s the opposite of what happened.

Stocks that were positive for at least half of the SPX downturn days in a month averaged 0.59% gain over the next month, with 56% of returns being positive. Stocks that were expected to have fallen on most of the SPX days of default in a month gained 1.62% on average, with 59% of returns being positive. Additionally, the stocks that performed best during the monthly days of default only outperformed the SPX 47% of the time over the next month. The stocks that had fallen on those market days outperformed the index 51% of the time over the next month.

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Implications

As is so often the case, the consensus doesn’t last if you put hard numbers behind it. When you hear an expert say that this is a good sign that a stock will hold up on a particular default day, you know the numbers don’t confirm it. Using my method above, these stocks will tend to perform worse than the stocks on that day in the future. Perhaps it is the broad market where certain stocks are bought climatically as the most avid buyers take advantage of what they consider to be an advantageous buying opportunity. That’s the best theory I can think of right now.

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