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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."

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