As of 12/27/2024
Indus: 42,992 -333.59 -0.8%
Trans: 16,031 -73.46 -0.5%
Utils: 987 -4.51 -0.5%
Nasdaq: 19,722 -298.33 -1.5%
S&P 500: 5,971 -66.75 -1.1%
|
YTD
+14.1%
+0.8%
+12.0%
+31.4%
+25.2%
|
 44,200 or 41,750 by 01/01/202516,700 or 15,500 by 01/15/20251,050 or 975 by 01/01/202520,500 or 19,300 by 01/01/20256,100 or 5,775 by 01/01/2025 |
As of 12/27/2024
Indus: 42,992 -333.59 -0.8%
Trans: 16,031 -73.46 -0.5%
Utils: 987 -4.51 -0.5%
Nasdaq: 19,722 -298.33 -1.5%
S&P 500: 5,971 -66.75 -1.1%
|
YTD
+14.1%
+0.8%
+12.0%
+31.4%
+25.2%
| |
|
44,200 or 41,750 by 01/01/202516,700 or 15,500 by 01/15/20251,050 or 975 by 01/01/202520,500 or 19,300 by 01/01/20256,100 or 5,775 by 01/01/2025 | ||
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This article discusses what happens a year after price doubles or drops by half.
A year after price doubles (or more) from the yearly low to the yearly high (meaning the yearly low came first), price continues to make a large move higher 53% of the time the following year.
After price drops in half (or more) as measured using the yearly high to low (meaning the yearly high came first), price makes a substantial recovery 68% of the time a year later.
The moves a year after price rises or drops substantially are much greater than moves by stocks not making such large initial rises or declines. In other words, stocks not moving much tend to remain static. When searching for stocks to buy or follow, look for those with a heartbeat, ones that tend to make large moves year to year.
Is it better to buy a stock after it makes a large drop in a bear market or one that retains more of its value by dropping less? A study I conducted does not directly address this question, but it does give a hint (a new study addresses the issue).
The question I was trying to answer is this: Are stocks that rise or fall by large amounts worth buying? Should you populate your portfolio with these types of issues?
To find out, I conducted a test which is described in the next section.
I started with a database of 567 stocks of various sizes (market capitalization) and prices. I found the yearly high and yearly low annually (which came first is important for determining a rise or decline) for each stock beginning in 1990 and running through 2008. Then I looked at the performance of the stock the following year on a close to close basis (the close of the first trading day of the year to the last).
I sorted the results into various groups, such as those stocks rising by at least 100% or not, and falling by at least 50% or not. The spreadsheet contains results sorted by years in a series of 19 contests (from 1990 to 2008). The summary results are shown in the table and discussed below.
| Year | Gain >= 100% | Gain < 100% | Loss >= 50% | Loss < 50% |
| 1990 | 84% | 34% | 42% | 25% |
| 1991 | 10% | 11% | 23% | 5% |
| 1992 | 46% | 11% | 22% | 7% |
| 1993 | -2% | -3% | -19% | 4% |
| 1994 | 67% | 33% | 54% | 30% |
| 1995 | 19% | 20% | 28% | 21% |
| 1996 | 30% | 31% | 28% | 24% |
| 1997 | 8% | 2% | -11% | -16% |
| 1998 | 57% | -15% | 19% | -10% |
| 1999 | -7% | 14% | -4% | 30% |
| 2000 | -6% | 2% | 13% | 15% |
| 2001 | -12% | 1% | -30% | -8% |
| 2002 | 62% | 22% | 47% | 23% |
| 2003 | 17% | 19% | 24% | 11% |
| 2004 | 42% | 9% | 19% | 4% |
| 2005 | 1% | 11% | 28% | 11% |
| 2006 | 15% | 3% | -20% | -4% |
| 2007 | -61% | -38% | -44% | -30% |
| 2008 | 16% | -2% | 34% | 10% |
| Sum | 385% | 165% | 253% | 152% |
The table on the right shows the median price movement a year after various gains and losses, sorted by year. For example, in 1990, stocks in which the yearly high was at least double the yearly low (with the yearly low coming first) showed a median gain of 84% a year later. This compares to a median gain of 34% for those stocks with a yearly low to yearly high rise of less than 100%.
For those stocks showing a decline at least 50% from the yearly high to the yearly low (in that order, meaning the yearly high occurred first), the stock showed a median rise of 42% a year later compared to those with losses less than 50% which had gains a year later of 25%.
The column showing stocks with gains at least 100% had median totals (the last line in the table) of 385% compared to totals of 165% for those stocks having median gains of less than 100%. In other words, stocks that climbed more than 100% tended to continue outperforming stocks by at least 2 to 1 over 19 years.
For stocks that lose 50% or more of their value (from yearly high to yearly low, occurring in that order), they show median gains a year later totaling 253% over 19 years. This compares to stocks that initially lost less than 50% showing gains of 152% a year later. Although the difference between the two, 253% versus 152%, is not as dramatic as for stocks making large initial gains, especially since it's spread over 19 years, the differences are startling nonetheless.
Comparing each year as a contest, stocks with large gains win 10 of 19 contests or 53% of the time in year-ahead performance.
For stocks with initial losses of at least 50%, they win 13 of 19 contests for performance a year later, or 68% of the time.
In other words, when a stock doubles from the yearly low to the yearly high (with the low and high occurring in that order), expect an unusually large gain the following year about half the time. If the drop from yearly high to yearly low (again, occurring in that order) is 50% or more, then expect an unusually high bounce the next year about 68% of the time. To put it another way, stocks that do well continue to do well. Those that make a large decline tend to bounce back. Those that don't move much tend to remain flat.
-- Thomas Bulkowski
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