In strange twist, the worst stocks are skyrocketing

From the beginning of the year through Wednesday’s close, shares ofWilliams and Freeport-McMoRan fell 47 percent and 45 percent, respectively, making them the worst-performing S&P 500 components by far.

On Thursday, Williams led the index with a 21 percent rally, as Freeport nipped at its heels with a 9 percent rise.

Crude oil’s more than 3 percent bounce no doubt contributed to the change in fortunes, as both companies are highly exposed to energy prices.

But there appears to be more to it than that.

An interesting dynamic is unfolding whereby the worse a stock was hit in the year through Wednesday’s close, the better it did as the market bounced.

The below chart — which compares performance in the first eight days of trading (on the vertical axis) to performance on Thursday (on the horizontal axis) for all the stocks in the S&P 500 (which each get a dot) — shows the strength of that inverse relationship.

While Freeport and Williams certainly contributed to the trend, even if those names are removed from the analysis, the relationship holds.

Further, there is some recent precedent for this powerful counter-trend move. Close watchers of the market will recall that as stocks sunk in the first session of 2016, the three best performers — Chesapeake Energy,Consol Energy and Southwestern Energy — were the worst performers of 2015, and in the same order. And that was a day on which oil fell.

Read MoreSomething pretty strange happened in the market

A few possible explanations suggest themselves. It may be that traders are convinced that energy stocks and other underperformers have finally reached the point of maximum pain. Perhaps investors are bottom picking for value. Or, more simply, it could be that traders are covering shorts, and booking substantial profits where they have them.

Either way, Thursday’s action should serve as a powerful reminder that current trends don’t last forever, so trying to squeeze the last dollar out of up or down moves may be a badly misguided strategy in a volatile tape.
[“source-businesstoday”]