Research favors stocks hitting new highs

Posted by: Aaron Pressman on May 23, 2007

Hot on the heels of the sale of Wallstrip, a video blog that focuses on stocks hitting all-time highs, comes a strong academic endorsement of just such a strategy. Thanks to the sharp folks over at CXO Advisory Group’s blog, you can read about a detailed study (PDF file) of momentum strategies. Bottom line: a strategy premised on buying stocks hitting 52-week highs is a big winner, producing returns double that of other momentum strategies after adjusting for risk.

The paper cited by CXO looked at a portfolio owning the 30% of stocks closest to their 52-week high over the following six months and a portfolio shorting the bottom 30%. Year round, this long/short combo would produce steady gains of almost 0.5% a month. The January effect, when stocks that performed poorly the previous year tend to rebound, skewed the results, however. In January, the bottom 30% portfolio massively beats the top 30%, by over eight percentage points. Conducting the 52-week high long/short strategy only for the other 11 months generated a gain of 1.2% a month. The researchers also found that using 12 months of past returns or holding the portfolios for 12 months wouldn’t change the results significantly.

Another paper out of New Zealand’s Massey University, found that the 52-week high strategy was also a good one for invetsing in non-U.S. stocks.

One caveat, and it’s a big one. The cited research looked at returns from 1963 through 2001. As CXO has previously noted, some recent research indicates that momentum strategies as a whole have lost much of their predictive value since 2000.

For some lively discussion and practical applications, head over to Stockpickr, where some pros give their views.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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