Besides an actual stock price quote the most available and commonly published piece of stock market information is what stocks have hit a new 52 week high or low today. Most financial newspapers will print the list, which is also available from just about any finance website. However, does this metric have any meaning or usefulness?
[VIDEO] 52-Week Highs and Lows — Hype or Helpful?
Some analysts propose that buying a stock hitting its 52 week high could be a reasonable strategy. Statistically speaking, there does seem to be some validity to that assertion. Conversely, avoiding a stock hitting its 52 week or yearly low is probably also be a good idea.
However, some caution and caveats are appropriate here. The 52 week time period is arbitrary and selected for convenience. The fact that investors pay so much attention to this artificial number is a great example of “anchoring.” Anchoring is what happens when decision makers (including investors) place a disproportionate amount of emphasis on a number or measure that has limited or no meaning.
The 52 week high or low is really just useful in trend identification. If a stock is at its 52 week high then its trend is positive. If a stock is near its 52 week low then its trend is negative. Momentum investors try to buy with the trend and the 52 week high is a convenient way to define its direction.
It is important to remember that the studies used to show that buying stocks at a 52 week high can be an effective predictor for above average growth in the future are based on large groups of stocks. Trying to apply a concept that works across large pools of stocks to just one or two stocks is not very reliable. Once again, diversification is needed to really see any benefits from buying uptrending stocks.
The effects of anchoring can also be felt in the volatility of stocks at their 52 weeks highs. It is common for investors to feel that a stock at its 52 week high “can’t” reasonably go higher in the near term. This attitude may be the contributing factor for stocks at these highs to have greater percentage price changes or volatility than would be normally expected.
While 52 week high lists can be useful in finding stocks with some uptrending momentum, diversification and the ability to sustain price volatility are needed to really take advantage of the opportunity. If you are interested in learning more or adding a few stocks to a paper trade portfolio, you can access a list of stocks hitting 52 week highs and lows here.
Image courtesy Lux Tonnerre.