Surges and sell-offs

You never know what you’ll find when you look into stocks that are bucking the market trend on a strong up or down day.

When the market gave back most of last Thursday’s record-setting intraday reversal on Friday, there were only a handful of stocks trading above $10/share that managed to post gains for the day. One of them was Harmony Biosciences (HRMY), a biopharma company specializing in overlooked neurological disorders.

But after gaining 2.1% on Thursday (and rallying more than 8% off its seven-day intraday low), HRMY jumped 7.2% on Friday for a two-day, 9.5% gain and its highest close since August 12 (final up arrow on chart):

Despite an exceptionally strong broad-market rally on Monday, though, HRMY bucked the trend again, pulling back more than 3% intraday. While it’s not unusual for a stock to give back a portion of a big price move—even if it eventually extends it—a simple experiment helps illustrate how important it is to understand the ebb and flow of prices over time.  

HRMY has made moves of this magnitude—a two-day gain of at least 9% while hitting a two-month or longer high—only seven other times, which isn’t enough to draw reliable conclusions about what the stock has done afterward. But if we generalize a little, we can identify similar price action that provides a bit more evidence.

For example, the following chart compares HRMY’s median five-day return since August 19, 2020 to its median five-day return after 1) two-day rallies of 7.5% or more (when the stock also closed at a two-week or longer high), and 2) two-day sell-offs of 7.5% or more (when the stock also made a two-week low).¹ There were 30 other examples of the two-day rally, and 17 of the two-day sell-off:

The first column shows HRMY’s overall median five-day return was more or less flat (-0.09%). But its median returns after the two-day rallies and sell-offs couldn’t be more different—not to mention counterintuitive for traders who assume strong, short-term momentum usually leads to more of the same. The stock’s typical five-day return after the rallies (the up arrows on the price chart) was -1.2%, while it gained 2.8% after the sell-offs (the down arrows)—an indication that these price surges tended to reverse (or slow down) more than follow through in the first five days after they occurred.

That’s not the end of the story, though. Take a look at the stock’s 10-day returns after the two-day rallies and sell-offs:

The results turn the five-day picture upside down. While HRMY’s overall median 10-day return was 1.3%, its typical 10-day return after the rallies was 2.1%, but -2.2% after the sell-offs. That suggests that, on a slightly longer time frame, the stock tended to revert to the same direction as the original price move. (But HRMY’s price chart also shows how different each individual case can be.)

Aside from being another example of the ebb and flow of short-term price momentum, this bit of analysis also shows the importance of understanding how that give and take can differ depending on which time window a trader consults. It can have big implications in terms of the type—and timing—of a trade.

Market Mover Update: Stocks picked up this week where they left off last week, with the S&P 500 (SPX) rallying more than 2% on Monday. That means over the past three days the SPX gained more than 2%, fell more than 2%, then rallied more than 2%—while also hitting its lowest low in at least two weeks. That’s a feat it’s accomplished only two other times (in March 2020 and August 2011) since 1983.

Today’s numbers include (all times ET): Industrial Production and Capacity Utilization (9:15 a.m.), NAHB Housing Market Index (10 a.m.).

Today’s earnings include: Signature Bank (SBNY), United Airlines (UAL), Goldman Sachs (GS), Johnson & Johnson (JNJ), Netflix (NFLX).

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¹ All figures derived from Harmony Biosciences (HRMY) daily price data, 8/19/20–10/17/22. Supporting document available upon request.