Investing in stocks that have hit 52-week highs is a form of momentum investing. The rationale is that traders are slow to react, or overreact, to good news. A stock whose price is at or near its 52-week high is a stock for which good news has recently arrived. This may be the time when biases in how traders react to news, and hence profits to momentum investing, are at their peaks. The psychological underpinning is traders’ reluctance to revise their reference point is price-level dependent.
Unlike straight-up momentum investing that looks at the top decile of stocks in terms of 200-day performance, the 52-week high model only gets activated when there are stocks hitting 52-week highs. In that sense, momentum investing is a continuous model whereas the 52-week high model is sporadic.
How does this sporadic model compare during volatile markets? If you look at the Feb 2013 returns (above) that was picked right before volatility hit and the broad indices tanked, the model outperformed the CNX 100 by over 7 points. The out-performance is largely due to the immunity that these stocks enjoy in terms of positive news flow. It follows that this model is ideal for short- to medium-term investors who like to time their entry into the market. The image below is the performance of the portfolio picked on Feb 2012 to give you a longer-term perspective.
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