Beaten-down names have led recent rally

There's something a bit off about the recent stock market bounce.

The S&P 500 has risen more than 6 percent in the past two weeks. But what's "most notable about the S&P 500's latest rally is that the bounce has been led by what were the worst-performing stocks of the year," observed Ari Wald of Oppenheimer.

In fact, Wald found that the 100 S&P 500 stocks that did the worst through September were by far the best performers in October, with an average gain of 11 percent, versus 4 percent for the market as a whole.

No surprise that this worst-performing quintile contains a healthy share of energy names. That sector is still down 15 percent this year but is leading in October with a 10 percent rise. Close alongside it is that other battered sector, the materials.

"Whether this is the start of a prolonged base-building process or simply a short-covering pause amid an established downtrend will be crucial in determining if the SPX can recover to new highs," Wald said.

The technical analyst ultimately believes that the market bounce will continue, but when it comes to stock selection, "we'd rather buy stocks that maybe haven't bounced as sharply but have held trend over the last few months, rather than going bottom fishing in Laggard Land."

Read MoreThe 'revenue recession' could be getting worse


Trades to Watch

Trader Bios


Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

Read more