A guide to the 52 week high and the risks of anchoring

Wednesday, Feb 21 2018 by
A guide to the 52 week high and the risks of anchoring

According to behavioural scientists, cognitive errors in humans can lead to duff decision making. For investors, of course, this kind of weakness can end up being costly both mentally and financially. But while being aware of such flaws won’t always save you from mistakes, it can offer at least some protection from making them.

There are few better places to explore just how big an impact ‘behaviour’ can have in the market than to look behind the scenes of the popular 52 Week High Momentum screen.

We track this strategy at Stockopedia and it’s up 20.9 percent over the past year - making it a top 20 performer. (It has returned 14.7 percent annualised over the past six years). It has also done well at resisting February’s market volatility.


But like most momentum strategies, one of the interesting things about the 52 Week Highs approach is that it piggybacks on the behaviour of other investors. In particular, it takes advantage of what’s known as Anchoring.

So regardless of what you think about momentum (or whether you’re even attracted by 52 week highs), knowing about Anchoring could change the way you think - consciously and unconsciously - about share prices. It can also explain, at least in part, why momentum is believed to be so powerful.

What is it about 52-week highs?

I’ve covered some of the inner workings of the 52 Week High screen a few times in the past (here’s the most recent article). It’s popular because the 52-week high is one of the most accessible data-points around. One year highs are literally published all over the place - and they tend to catch the eye of investors.

But while the data for the strategy is readily available, the psychology that makes it useful is intricate. To a large degree it calls on the ‘momentum’ investor to know that a share trading close to its 52-week high will probably sustain its upward trend over the near- to medium-term. But why would it do that?

The answer lies in what’s called (mostly in academia) ‘post earnings announcement drift’ (PEAD). As the name suggests, this describes the slow, steady upward trend in a share price that often follows positive earnings news. In essence, it’s the market taking much longer than usual to price in the full…

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>

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23 Comments on this Article show/hide all

Mike888 21st Feb '18 4 of 23

In reply to post #328313

Hi Howard,

When you say they have performed stunningly well, do you mean by shorting them or by riding the upward trend ? I'm just curious

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Nick Ray 21st Feb '18 5 of 23

Do you need to invoke behavioural finance to explain how well the "% vs. 52w High" ratio works?

If you use a simple model of stock prices based on GBM (dP/P = udt + sdW) you quickly find that the probability that the "% vs. 52w High" value is above some amount is closely related to u/s which is of course approximately the Sharpe Ratio.

In other words, "% vs. 52w High" is a fairly decent substitute for the Sharpe ratio, and a screen based on this ratio will tend to select stocks near the (medium-term) efficient frontier.

In the graph below the efficient frontier is the region close to the upper envelope formed by plotting u and s (called m and sd in the plot) for every stock in your universe. The red blobs are stocks from the 52-week High Momentum screen.


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Andrew L 21st Feb '18 6 of 23

Ben, Interesting article. I thought of focusing on 52-week highs exclusively at one point. However, it is a very broad sieve and would pick up everything. It is like fishing with a net that kills everything.

The 52-week high filter will by definition identify future winners. However, it will also identify everything else. It must also be literally true that it is better to buy strong stocks at a cheaper price before they hit 52 week highs. The hard part is identifying them.

The one addition to the 52-week high filter would be stocks that are hitting the 52 week high for the first time in the 52 week period. This would focus on companies that are potentially just coming through. This could then be a focus of research. If this was sent as an e-mail it would be useful.

A general 52 week high filter just generates too many results. It also includes companies that are overpriced and where the momentum may shortly reverse.

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iwright7 21st Feb '18 7 of 23

In reply to post #328353


I look for 52Wk Highs, but am very discriminating as to what I buy. A company needs to have other things going for it e.g. High F-Score (improving metrics), High return numbers (likely operational gearing) and a  +ve chairman's outlook (on a roll).

Anchoring does contribute to +ve PEAD, but so does buying by individuals with inside information that a particular company is preforming above its market expectations. I much prefer to buy companies which fit these combi-criteria, to put the odds of future out-performance in my favor. Ian

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zeibots 21st Feb '18 8 of 23

In reply to post #328353

Why 52 week high , why wait for 52 weeks ? In a strong market I like to look for Minervini`s entry points. He uses a cup and handle pattern somewhat similar to William o`Neil, but Minervini is more selective, he also looks for theVolatility Contraction Pattern (VCP) at the handle end. Interestingly when the share breaks out from this pattern to the upside, at this point it is very often also a new high but not necessarily a 52-week high.
In his strategy this would also be supported by solid earning performance and the correct volume characteristics for the precise entry point.

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Andrew L 21st Feb '18 9 of 23

In reply to post #328483

zeibots - the rationale for the 52 week high is that current shareholders are optimistic and any former selling pressure has fallen away. So the 52 week high is meant to be a selective momentum filter. Some stocks show short-term momentum that filters away and they never hit 52 week highs. The stocks that hit the 52 week highs may be set for a period of ongoing momentum.

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Andrew L 21st Feb '18 10 of 23

In reply to post #328448

Yes I guess the trick is to be discerning with 52 week highs. Buying them early on also helps. The idea of just buying any 52 week high doesn't make sense to me. However, it is nice to have a momentum tailwind so that if you do have to cut it isn't necessarily at a loss. The 52 week high filter throws up lots of hyped up stories. However, there will also be good companies there.

Looking today and we have London Stock Exchange Group, On the Beach, Craneware, Curtis Banks. So some good companies in there. A lot may be questionable though. Royal Mail Group for example which is really just rebounding.

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tony777x 21st Feb '18 11 of 23

In reply to post #328518

The big advantage of a 52 week high as I understand it and as Minnervini points out is that there is greater chance at that point of strong holders been in the stock at that as some weak holders would exit at the natural 52 week high resistance point. This would in turn potentially create a line of less resistance to the stock going up.Remember if you have bought at a 52 week high there is no one who has bought at a more expensive price and therefore selling pressure should be less .If you bought below the 52 week there may be overhang to contend with.

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Andrew L 21st Feb '18 12 of 23

In reply to post #328623

tony777x - exactly that is what I meant. So basically the 52 week high means that holders of the stock are on balance happy to hold. Any sellers have been flushed out. So going forward any further buying pressure will push the stock up. This can of course change if holders of the stock change their minds or if there is news. But the 52 week high can be a signal that current holders expect further upside. Otherwise they would sell when the price hit its highest level for a year. Of course general volatility can obscure the importance of the 52 week high. It should, though, be fairy instructive. The key point is that unlike an intermediate period high, such as for a month, a 52 week is the highest level reached for a fairly long period. A year is a reasonably long period for a share price to hit a new high.

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Nick Ray 22nd Feb '18 13 of 23

Much of the argument here seems to be focussing on a trading philosophy. But here is a more long term view.

If a company is growing then its share price should be continuously making new highs and so its price should stay reasonably close to its 52-week (or any other long term) high. The "% vs. 52w High" ratio gives the percentage distance to the high, so the smaller this is, the less the drawdown giving a rough measure of the volatility and maybe also the probability that the stock is growing rather than falling. (you probably need an additional screen such as "RS 1yr" or "% 50dMA / 200dMA" to be sure that the stock is growing and not just stationary!)

So rather than trying to spot stocks which are making a 52-week high for the first time, or which are reversing from a falling price to possibly a change to a rising price, this ratio can be used to find stocks which are long-term reliable growers with lowish volatility.

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iwright7 22nd Feb '18 14 of 23

Nick - Completely agree.  

The case for combining 52Wk High with other metrics has been strengthened by a recent research paper entitled; “Trading Against Anchoring”.

The report uses US common stocks from 1990 to 2013 and the Anomaly metrics mentioned include for example; previous momentum, F-Score, ROE and ROA. 

The authors found that; when 52 Week High is combined with any one of 26 anomalies the average long/short quintile return increases from 0.6% to 1.4%/month. Previous momentum is the greatest contributor. Beta is on average reduced from 1.59 to 0.81 implying lower risk.


Curiously I see that the paper has only been downloaded 125 times since publication in October 2017, so there either isn't the awareness, or the interest in this aspect of investing.  Whilst I wouldn't attempt a similar long/short portfolio, the results do give an insight as to how to nudge investing odds in our favour, but it needs a different mindset to the crowd.  As ever please DYOR.  Ian

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pka 22nd Feb '18 15 of 23

In reply to post #328643

Nick, You wrote:

"If a company is growing then its share price should be continuously making new highs and so its price should stay reasonably close to its 52-week (or any other long term) high. The "% vs. 52w High" ratio gives the percentage distance to the high, so the smaller this is, the less the drawdown giving a rough measure of the volatility and maybe also the probability that the stock is growing rather than falling. (you probably need an additional screen such as "RS 1yr" or "% 50dMA / 200dMA" to be sure that the stock is growing and not just stationary!)"

For the stocks I've looked at, I've noticed that there seems to be a high correlation between the "% 50dMA / 200dMA" ratio and the "% vs. 52w High" ratio. In other words, stocks that have prices that are growing significantly over recent months (because the 50-day average is higher than the 200-day moving average) are also likely to be close to their 52-week high. As you pointed out, using the "% vs. 52w High" ratio on its own might select some stocks that are not really growing because their prices have been fairly stationary over the previous 52 weeks. But using the "% 50dMA / 200dMA" ratio on its own is less likely to select stocks whose prices are not really growing.

Perhaps that is why Seung-Chan Park found in his research that portfolios selected from stocks with high values of the "% 50dMA / 200dMA" ratio performed better than portfolios selected from stocks with high values of the "% vs. 52w High" ratio, and they also performed better than portfolios selected from stocks with high values of "RS 1yr":


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cafcash49 22nd Feb '18 16 of 23

It is interesting that some feel a 52 week high as a buy signal doesn't make sense. I agree a lot of other factors need to be taken into account but if a share is in a strong upward trajectory it is highly likely to be hitting 52 week highs. So use it as a research tool and then dig deeper. By the way I have recently started to use ADX as a device to decide when to buy. By using colour shading it makes it more readable. Add it to your chart view for each share. Hope this helps. Charles (cafcash49)

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zeibots 22nd Feb '18 17 of 23

In reply to post #328508

Your rationale for the 52 week high in your own words is `optimistic`,`meant to be` and `may be` in other words wishful thinking.
The important thing to understand is that momentum is not an exclusive domain of the 52 week high phenomenon. There are more important considerations such as the momentum/volume relationship. Interestingly one of the companies quoted in this article was SKY. Here the breakout on 23/01/18 from a typical Minervini VCP pattern demonstrated the momentum/volume relationship.
The key I think is to have a foot in both camps - the technicals as well as the fundamentals and to have a clearly defined investment strategy.

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Nick Ray 22nd Feb '18 18 of 23

In reply to post #328808

Ian and pka

Thanks for the links. Perhaps having to pay £22 is why that first paper has only been downloaded 125 times!

Below is a biplot which shows how a range of Stocko ratios correlate with each other. You will see that the momentum ratios (in green) are all very strongly correlated with each other and the "Momentum Rank".

The "% vs. 52w High" ratio is also correlated with volatility metrics. On the plot Volatility is called "STABILITY" because the correlation with Volatility is negative -- that is the volatility measures (sd128 and sd256 here) are scoring in the negative direction ("bigger is worse"). "% vs. 52w High" scores strongly positive ("bigger is better").


If you can't read the plot try [right-click, show image] for a bigger version. Otherwise, just note that all the green arrows are momentum-based ratios and they all clump together.

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iwright7 22nd Feb '18 19 of 23


Thanks for the graph. I have not seen one of these before and I am not sure I fully understand.

1. Does the graph illustrate that one Momentum metric strongly reflects the other Momentum metrics, (but not so much % 52 week High).
2. Does this mean % 52Wk High is best combined with any of the other momentum measurements to get a fuller picture - If so I concur.
3. As Stockrank is up there with the Misc Momentum metrics, does this mean that Stockrank outperformance is principally a momentum effect?

In relation to the £22 cost of the Anchoring research paper, I am one of the 125. Its small beer in the scheme of things as only one smidgen of actionable information that reduces a loss, or increases gain this covers its cost. If its the cost holding other investors back, there is even more opportunity to beat the market than I realise.   Ian

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Nick Ray 22nd Feb '18 20 of 23

In reply to post #329073


It's called a "biplot" and it is one way of displaying the results from a Principal Components Analysis. Essentially your point 1 is exactly right: it is showing the correlations between different metrics and all the momentum metrics seem to be very highly correlated - "when you've seen one you've seen 'em all" so to speak!

The Stock Rank actually correlates quite well with axes made from momentum, quality or value as you might expect. (In doing this particular PCA I found five axes of interest, of which Q V and M were three.) So for example if I create a biplot of Momentum versus Value you will see that the Momentum Rank and Value Rank align well with their respective axes and Stock Rank splits the difference:


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Andrew L 22nd Feb '18 21 of 23

In reply to post #329013

zeibots - I think "wishful thinking" is not really an accurate way to describe what I said or the 52 week high filter!!!! I was just saying that 52-week high may indicate a company/stock about to do well. But it is a very broad sieve. So it will also capture hyped up stories.

So I agree with you that we also need to add fundamental filters. I wasn't undertaking wishful thinking I was just saying that by itself the 52 week high filter is pretty poor.

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iwright7 23rd Feb '18 22 of 23

An example of a buy with my 52Wk High Combination criteria has cropped up today. The company is Spectris (LON:SXS)

....A company needs to have other things going for it e.g. High F-Score ( 8 = improving metrics), High return numbers (19% ROE  and  14% ROA  - likely operational gearing) and a +ve chairman's outlook ( Yes - on a roll)

In addition there has been big Stocko ranking improvements this morning: SR +37 to 94, M +51 to 98 together with multiple broker upgrades.   Have brought an initial holding and will see what transpires.  Ian

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Cjenkins8 23rd Feb '18 23 of 23

In reply to post #328663

Doesn't help that you have to pay £20 to download it!

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