:max_bytes(150000):strip_icc()/GettyImages-2259052576-5429f9e494254a3dafe3e8e05a3b1a0f.jpg "Do Stock Sell-Offs Pay Off? These Experts Warn Not to ‘Bottom Feed’ on New Lows")
:max_bytes(150000):strip_icc():format(jpeg)/GettyImages-2259052576-5429f9e494254a3dafe3e8e05a3b1a0f.jpg)
Key Takeaways
- Beaten-down shares—like the software and related stocks lately trading around fresh 52-week lows—aren’t as desirable as they may seem, some market experts say.
- Losers tend to keep losing, academic literature show.
The classic refrain of “buy the dip” may sound like a siren song.
The recent selloff in well-regarded software stocks may lead some investors to think it’s time to snap up seeming bargains. (Think companies like Adobe (ADBE), Salesforce (CRM), Intuit (INTU), and Workday (WDAY), all of which are trading around 52-week lows.) But should you leave them alone for now? Some Wall Street experts have recently warned “don’t buy new lows,” citing academic studies that show that momentum can be a dangerous force to be reckoned with.
The list of stocks making new lows may include software stocks with good reputations, DataTrek’s Nicholas Colas and Jessica Rabe wrote in a note Tuesday evening. But “our advice is to be very careful if you want to bottom feed on any of them.”
WHY THIS MATTERS TO YOU
With broad market indexes sitting near record highs, investors may be inspired to bargain hunt. But some bargains are discounted for a reason, according to analysts who say pullbacks from new highs make better bets than drops to new lows.
“We have seen more Wall Street careers end prematurely by breaking the “never buy a new low” rule than any other investment/trading mistake,” they said.
The co-authors cited a study from Erasmus University researchers and Northern Trust, which analyzed the returns for long-short stock portfolios of U.S. and international stocks—essentially, those that both buy stocks with the intention of watching them rise and sell short others they expect to fall—with the best and worst price momentums from 1990 to 2024. (Momentum is a measure of the rate of change in the price of an asset.)
The data, according to Colas and Rabe, show that “being long names with positive price momentum and short those with weak momentum yielded positive average annual returns in the U.S. and 30 other countries.”
In other words, winners tend to keep winning and losers keep losing. Colas and Rabe suggest waiting for price stability before picking through the wreckage. (They didn’t mention it in their note, but beta is one traditional measure of a stock’s volatility.)
The story might be different for stocks recently backing off 52-week highs. Deutsche Bank macro strategist Henry Allen in a Wednesday note observed that the year has been marked by a pattern of “sharp sell-offs that quickly recover, sometimes within hours.”
The reasons for those sell-offs vary, with geopolitical risk causing the mid-January swoon and Greenland-related tariffs hitting stocks shortly after that. Capital expenditure concerns upset the S&P 500 in late January, and a plunge in gold and silver bled into the broader market earlier this week. What’s meaningful about those declines, Allen wrote, is that “they fail to inflict lasting damage.”
“When we’ve historically seen more durable market downturns, it’s consistently coincided with a fundamentally negative reassessment in the macro outlook, which we haven’t yet seen today in any meaningful sense,” he said.
