There’s a popular saying out there: “So the last shall be first, and the first last.“
It turns out this is a phenomenon that is sometimes observed in the stock market.
“It is the time of year when we should expect the laggards to start their outperformance run into February,” FBN Securities’ JC O’Hara said in a note to clients. “Typically, the most beaten down stocks on the year see inflows.”
This is a trade that’s probably not suitable for most people. Investors should do their homework before deciding to buy a stock with the hope that it will go up just because it’s down.
Having said that, it’s interesting to see what the history actually shows.
“Our data, going back to 2006, show in every year except last, the bottom decile year to date performers entering December have not only outperformed the S&P 500 into February, but also outperformed the top performing decile,” O’Hara noted. “This laggard to leader trade can also be applied to smaller cap stocks which have weaker breadth but are expected to benefit from seasonal tailwinds. Lastly, in the data we have examined, Small Caps outperformed the S&P 500 into the first rate hike and also outperformed coming out of that rate hike.”
The trade didn’t work out this past year. O’Hara noted that it was due to energy companies whose stock prices continued to underperform in the wake of last year’s oil crash and this year’s persistently low oil prices.
For what it’s worth.