Daily Brief - Which stocks rebound first?

TL;DR

Yes, or no? At some point or another, regular readers of this newsletter were probably engaged in this discussion: was June 16 the end of the Bear Market? Inflation is rolling over. Well, at least core inflation might be, excluding stuff that’s actually going up in price like food and fuel …. Supply chains are getting sorted out. Investor sentiment is awful, say the bulls. Let’s play along. If the bear market did in fact end in June, what stocks do best around market bottoms?

The final Bear growl?

Assuming that the Bear is gone and the market low has been put in place is a big leap of faith. There are at least a few key ingredients - laid out in our earlier Daily Brief as the Bear Market checklist - that are still missing:

1. Typically, a bear market would last 10-12 months - it’s only been six thus far
2. A top-to-bottom correction is usually 36% - we have managed just under 24% in this one (S&P 500)
3. Equities often retest the lows - that has yet to happen
4. Lacking one or two big 10-1 up days where 90% of the volume is buying vs. selling

Be that as it may, it doesn’t hurt to go through the hypothetical exercise anyway. What if …

Do try this at home!

To do this, we take a look at past bear markets over the past 20+ years. For anyone reading this, you can definitely “try this at home” - just use the TOGGLE Scenario tool to test performance of individual stocks around major market lows.

Carmax, for example, turns out to have done incredibly well early once a new bull market kicked off. Its “week 1” median return is 20%+.

The stock was up a scarcely believable 90% six months after a bear market ended in the last 20 years.

The winners

Running this exercise for every stock in the S&P 500, here are the stocks that had the best performance in the first month after the bear market ended. The Performance column reflects median performance (i.e. in at least half the cases, performance was that or higher) while the Confidence Interval shows

Encouragingly, it’s a mix of sectors: financials, tech, consumer stocks … If you are not looking to bet on just a single stock or a sector, creating baskets like this one can be a good way to supercharge the rebound bet while still diversifying enough to protect the downside. In fact, beyond a certain point the benefits of diversification for the purpose of reducing portfolio volatility start diminishing quite rapidly. Ray Dalio at Bridgewater has made that point quite forcefully on several occasions. (The chart below is from an article on Intrinsic Investing, and articulates this idea far more elegantly.)

In conclusion, we won’t know for some time whether the Bear market is over - we think not, see above - but it’s never too early to start kicking around some ideas for the “bull market” trades and build your watchlist.

Idea Spotlight: Amazon

Volume analysis indicators for AMZN:NASD have been mostly positive and historically, this led to a median increase in price of 21.73% over the following 3M. TOGGLE analyzed 16 similar occasions in the past to produce the median projection and this insight received 6 out of 8 stars in our quality assessment.

Amazon's 20-for-1 stock split in early June didn't really provide a catalyst for the stock but is the split finally starting to pay off?