Buying after selloff (after negative years)

Is it a good time to buy after several years of bear market?

I test the performance of a strategy for the Dow Jones Industrial Index for the period of 1930 to 2008 that does the following:

1. We buy the index after a y% drop since the highest value the index had within the last 1000 days (the optimal z is 1000, i.e. 3 years)

2. We then keep the index until we achieve a profit of x% and sell it again.

The result is as follows: In all cases we underperform a simple buy-and-hold strategy as we can see in the diagram below.

The diagram below shows that the more days we were long, the better the result. I.e. when we only sold after we made a profit of 80% and bought again after the market dropped only 10% the best result was achieved.

The result gets much more interesting when we start using an unlimited amount of leverage. I.e. I annualize the performance of the trades to see whether the days and weeks after a sell-off are more prone to deliever a positive performance than any other days. The diagram below could make us think, that a 57% drop since the 3-year high is a strong buying signal.

Unfortunately we can't draw this conclusion because when we look at the diagram that shows the amount of trades (2nd diagram on this page) we see that this happened only once since 1930. when applying the Wilcoxon Ranksum test the outperformance is not statistically significant.

Conclusion: It would be false to say that just because the stock market dropped by a certain amount over the last three years, it is more likely to outperform in the years to come. This analysis shows that the past performance, no matter how negative, has no positive influance on the future performance. The only case in the past where an outpeformance was achieved was when the stock market dropped more than 50% over a period of 3 years. But since this only happened once, we can't draw any statistically significant conclusions from it.