Don't be scared of stocks hitting 52 week highs
If you are a value investor and short-term investing is an untouchable concept for you perhaps you will not find much interest in below post
As a traditional investor we don’t know pay attention to stocks hitting 52 weeks highs on a regular basis as they are considered to be hot stocks or tip stocks gamed by speculators. But ignoring such stocks in not a great idea if you are a practical investor
Imagine you were a retail investor and had seen Symphony Ltd mount back to back 52-week highs in Jan’14 . Due to the way we are programmed we would ignore such info and look for other bargains in the market
Have a look what happened in one year
In last 365 days the stock has hit a new 52 week highs (the green dots) 67 times. Almost 1.25 times a week
What stops us from buying 52-week high stocks ?
Anchoring bias - The anchoring effect describes how we can be influenced, or “anchored,” on specific information, when stocks are at a 52-week high, this creates a psychological barrier of sorts, beyond which investors think the stock is unlikely to go. Investors discount the possibility that the stock will continue higher, which induces them to sell or at worst not participate in stocks journey to new life highs
Now before going ahead let’s understand
What causes some stocks to hit continuous weekly highs?
First time or renewed institutional interest creates liquidity in illiquid stock and the stock price zooms
Corporate event that could benefit shareholders , this doesn’t result in sustained and new 52-week highs
Consistent good performance of small cap company gets re rated in bull market
Gaming of a stock with no prior track record, again chances of this sustaining for 3-4 month period are minimal as the early starters would want to dump the stock after pumping it up
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Last year I wrote on how Darvas used a similar technique to make millions in markets, you and me are not Darvas however we can get new investment opportunities (Core or Non core) by tracking companies making fresh highs
Monitor 52-week high data it takes 5 minutes – Use this link after market closing hours
Copy the data and start maintaining daily record in an excel
After saving data for 15 days, Start looking for companies making 52 weeks multiple times in the 15 day trading period
Limit down to Industries/ Sectors that you understand
See last five-year operating history to rule dud speculator driven companies (Bullet 4 above)
Value company on growth basis, You can use our tool to do so
If value of company is discount to growth measures pull the trigger, keep a hawkish stop-loss and enjoy the ride
Have a fantastic 2015 :)
Feautured Image - thestreet.com