Momentum investing strategies have a natural dislike for bearish, unsettled conditions. So it’s no surprise that some of them have been on the ropes this year. But with the market clawing its way back from the summer slump, one of our most beloved momentum screens - the 52 week highs list - is starting to look a bit healthier. It comes as new research shows that a simple addition to this strategy could improve its returns.
New ideas from new highs
Momentum - arguably one of the market’s most powerful profit drivers - has been the name of the game in the stock market over the past decade. Value strategies have suffered at the hands of popular growth stocks, which have been on a relentless march, notching up multibagger-like returns.
But over the past year or so, the tables have shifted. Strategies that surf the upward price drift caused by momentum catalysts like earnings surprises and broker upgrades have struggled to find shares. In the past, this has signalled the start of a change in market direction. A different view might be that momentum has just hit a bump in the road, rather than completely crashed.
One of the most popular momentum strategies is the 52 week high, which is an approach I often pick up on, with good reason. For a start it brings together a very simple, accessible data-point with some intriguing academic research into the way investors think and behave...
The idea is that stocks at new highs are prone to being priced incorrectly. Holders who have ‘anchored’ at a previous price may be slow to buy at the new high (and may even sell to lock in profits). Meanwhile, others may be hesitant to buy stocks that have already risen sharply. Over time, this fog of uncertainty clears and the price of 52 week high stocks can drift higher.
But the 52 week highs list is interesting for other reasons, too. It’s like the stock market’s gossip column. It’s the list that everyone likes to look at, whether or not they act on it. It’s a window into the market’s latest big winners, recent takeover targets and the sectors and industries that could be on the up. For technical traders, the 52 week high is like an age-old friend - always there to offer new ideas.
