Here’s a question. Suppose that a share you own just hit a 52-week high price. Does that make you nervous enough to sell and pocket the gains, or bullish enough to buy more? Let’s put that a different way. A share that you’ve been considering buying just hit a 52-week high. Do you buy it, or lose interest because you have missed out and it’s now likely overvalued?

Questions like these are part of the reason why the 52-week high is one of the most curious of all the factors connected with price momentum. On one hand, it’s a commonly quoted and memorable fact about a share. You can easily find lists of new highs in newspapers and financial websites anywhere in the world. Yet according to research, these snippets of price information can cause investors to behave irrationally - even though they might be completely unaware of it.

A short history of momentum

To understand the confusion caused by the 52-week high, it’s worth exploring how and why it fits into the broad church of momentum. Back in 1993, two finance academics, Narasimhan Jegadeesh and Sheridan Titman, propelled momentum into the limelight. Their research delivered the very simple finding that shares with extremely high or low recent returns often carry on the same trend for between three and 12 months. In other words, what goes up tends to keep going up. And what goes down… well, you get the idea.

In the decade following these findings, a great deal more research was done to pin down precisely what it is that drives the price momentum anomaly. One of those papers was produced by Thomas George and Chuan-Yang Hwang. They claimed that the 52-week high price explains a large portion of the profits from momentum investing.

Specifically, they showed that the 52-week high has very predictive qualities because investors use it as a reference point against which they decide the potential impact of new news about a share.

They found that when good news has already pushed a share price up to (or near to) a new 52 week high, investors go cold on bidding the price up any higher. That 52-week high acts like a brake on sentiment, even if the news about the share really does warrant a further rise in price. Over time,…

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