Trader’s Narrative

Barry Ritholtz at The Big Picture had a recent comment about never buying a 52 week low. As you might expect, such absolutes simply don’t exist in trading.

Here’s fellow RealMoney.com columnist James “quant-jock” Altucher’s take:

I took all Nasdaq 100 stocks since 1996, including stocks that have been deleted from the index (to avoid survivorship bias). What happens if you buy stocks hitting 52-week lows that are trading for greater than $5 (avoiding penny stocks) and sell them one quarter later?

The results actually demonstrate that, over this period, the odds were on your side to outperform the market if you bought stocks at 52-week lows. The average return per trade was 7.34% (over 662 trades), including wins and losses. This far outperforms the average return per quarter of the Nasdaq during this period of 2.6%.

Some 60% of the trades turned out favorably and 40% were failures.

eBay is another, less quantitative, example of this “never buy a 52 week low” rule breaking down. eBay is a very seasonal stock which tends to bottom in the summer and top at Christmas and New Year’s.

Such seasonality makes sense because as people go out and enjoy the warmer weather, they aren’t inside selling/buying on eBay’s platform. But when the year rolls on, activity picks up as people buy gifts for Christmas and New Year’s.

This cycle naturally gets reflected in eBay’s stock. A bit like this example from 2004:

A simple rule based on buying in the summer (lets say end of July) and selling at the end of the year between Christmas and New Year’s showed the following returns in previous years:

In 1999: buy $11, sell $18 beautiful (but wasn’t everything going up then?)

In 2000: buying in the summer ($11) and selling at Christmas would have lost money… but you had a chance to sell at a good profit when it lifted to $20 in autumn 2000… before the subsequent decline in price.

In 2001: buying in the summer at $15 gave you a drawdown as eBay fell to $11 before rising again to $15 at Christmas.

In 2002: buying in the summer at $13.50 - after a tiny drawdown - saw eBay reach $18 by Christmas.

In 2003: buying in the summer at $26 gave you $32 at Christmas.

In 2004: buying in the summer at $38 gave you $58 at year’s end (see above chart).

In 2005: buying in the summer at $42 - traversing a slight drawdown - gave you $46 at Christmas.

What about this year? eBay has been getting pummelled this summer along with the general market and technology stocks in particular. Will the seasonal tendency repeat? Stay tuned and I’ll tell you in about 5 months

In the meantime, I hope it’s clear that such ‘rules’ are nonsense. A 52 week low has no real significance, taken out of context and certainly should not determine whether you buy or sell a stock in isolation.

And in case neither James Altucher’s Nasdaq 100 study nor the eBay seasonality I pointed out has persuaded you, here is another example of buying a 52 week low that worked out nicely.