Analyzing 2017: What’s the Likelihood That You’ll See a Stock Bounce Back After a Big Sell-Off?

Home Capital Group Inc. (TSX:HCG) bounced back after a sharp decline back in April, but how often does that recovery really happen?

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

When stocks dip in price, it sometimes attracts the interest of investors looking for a bargain, because the expectation is that the share price will rebound. I decided to challenge the accuracy of that hypothesis by looking at data from 2017 to see just how likely a stock is to bounce back after a bad day. I pulled the data for 30 of the most popular and actively traded companies on the TSX last year, and I’ll go over my results below.

Big or moderate drops in price don’t happen often

One of the reasons that value investors might get excited about the prospect of a big drop in price is that it’s not a frequent occurrence. With over 7,000 data points from last year, the stocks I selected had moderate or big drops in price only 732 times, or ~10% of the time. I defined a big drop as being a decline of 5% or more, and a moderate one as more than 2%.

Drops in price: how often is there a bounce back?

More than 60% of the time, a big or moderate drop in price wasn’t followed by a strong performance in either direction. In just over 16% of cases, there was a big or moderate jump in price after seeing a noticeable decline in the prior trading day. In 20% of the cases, a big or moderate drop in price was followed by another one.

If we narrow in on big price drops of 5% or more, then we see more of a trend, but it is still far from significant. A big drop in price was followed another one only 6% of the time, while a moderate one was much more common, occurring 23% of the time. On a positive note, a big jump was actually more common than a moderate one in the day following a big decline, occurring 15% of the time compared to just 8%.

A good example of a big bounce back is what happened with Home Capital Group Inc. (TSX:HCG). In April it went over a cliff, dropping 65% in just one day, and it increased 34% the following day. The stock would go on to see even more of a recovery in the months ahead after receiving a lifeline from Warren Buffett, but it is still nowhere near the price it was at before the big sell-off happened.

What do these results tell us?

For investors that are looking to earn a quick profit after a steep decline in price, the proof just isn’t there to show that it’s worth the gamble. In the majority of cases, there isn’t significant activity in either direction, and you could possibly be left with a stock that you really didn’t want.

Takeaway for investors

While a big drop in price might be an opportunity to buy in at a lower price, it is not a guarantee that a stock will bounce back. Ultimately, you want to look for stocks that have strong fundamentals, regardless of their current position. The danger of waiting out a stock that’s had a big drop is that you could miss out on gains along the way. If the stock is a good buy, then in the long run it won’t matter too much whether you bought it at $100 or $95.

Should you invest $1,000 in Home Capital Group right now?

Before you buy stock in Home Capital Group, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Home Capital Group wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $21,345.77!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 24 percentage points since 2013*.

See the Top Stocks * Returns as of 4/21/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor David Jagielski has no position in any of the stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Investing

investor looks at volatility chart
Investing

I’d Put $5,000 in These 2 Canadian Stocks Despite Current Market Uncertainty

Here are two top Canadian stocks long-term investors worried about continued uncertainty may want to consider.

Read more »

RRSP Canadian Registered Retirement Savings Plan concept
Top TSX Stocks

Here Are the Average Canadian TFSA and RRSP Balances at Age 45

Are you investing enough? Learn what the average Canadian is investing in a TFSA and RRSP at age 45, and…

Read more »

A plant grows from coins.
Dividend Stocks

TFSA Income: 2 Top Dividend-Growth Stocks With 5% Yields

These stocks have increased their dividends annually for more than two decades.

Read more »

Senior uses a laptop computer
Stocks for Beginners

Smart TFSA Strategy: How I’d Invest $10,000 in Today’s Canadian Market

A TFSA can save you a massive amount of cash, especially if your investment hits a huge home run. Here's…

Read more »

clock time
Dividend Stocks

This Canadian Dividend Stock Down 68%: Why I’d Add it to My $7,000 TFSA Investment

Do you want trophy office assets at 40 cents on the dollar while collecting an 11.4% distribution yield? This beaten-down…

Read more »

A steel grain silo storage tank with solar panel in a yellow canola field in bloom in Alberta, Canada.
Energy Stocks

3 Canadian Green Energy Stocks to Buy and Hold in Your TFSA for a Sustainable Future

Renewable energy stocks are some of the best options for long-term growth, and these are top options.

Read more »

Man holds Canadian dollars in differing amounts
Dividend Stocks

How I’d Use This 8.7% Monthly Dividend Stock in my Income Strategy

This monthly dividend stock continues to be one of the best options for investors looking for passive income.

Read more »

A child pretends to blast off into space.
Top TSX Stocks

How I’d Navigate the Market With Canadian Value Stocks in My Portfolio

The current market scenario is nirvana for value seekers as the fear of a recession has pulled down the price…

Read more »