With this simple question in mind, we looked at 3 key factors: the percentage of the market’s upside upside or downside, the percent gain or loss in the upside or downside, and the market’s price. We took into account the market’s historical performance (and therefore the trend) as well as historical momentum (a measure of how much one stock gains when a stock drops). We then compared this result to historical data from the same period for all stocks and indexes that share the same company.
To see more about our methodology, check out this video. It explains the steps we took, how we selected the stocks we looked at and some of the limitations in our study to determine which stocks had the highest and lowest returns.
What do we have found? The biggest problem with our study was that the only stocks analyzed are from the Standard & Poor’s 500 index and are large companies on Wall Street. While all stocks have been through significant downs and upticks, few are as big as the 500. With this limitation in the lens, our results point toward a correlation between a stock with a positive price movement (i.e., a trend) and increased upside or downside. In other words, the more the market rises, the more that stock has been up. The more the market falls, the more negative the stock has been.
What does this mean for me as an investor? For the most part, our results aren’t surprising. We have consistently shown that a stock’s price moves inversely to the strength of its momentum. However, there are some exceptions.
We determined that there is no correlation between a company’s price growth and its performance when its market move is positive. Instead, some factors indicate that stocks with price movements more in line with the U.S. equity market will perform better than those that move in the opposite direction. In other words, if you believe in momentum, you should buy shares in companies which have a positive price movement; otherwise, you should hold companies that are more tied to a downtrend than a rally.
For those with a penchant for volatility and extreme results, our results are also good news. The bigger percentage gains from a positive trend is associated with a higher performance. Conversely, we discovered that there is more potential risk for investors trying to outperform their portfolio. In other words, the smaller percentage gains from a negative momentum move is associated with a lower return. To reiterate, a positive trend move may increase your return. Conversely, a negative trend may lower
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