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Should You Buy or Sell a 52-Week Low ? at Trader’s Narrative





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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:
EBAY seasonality.png

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.

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11 Responses to “Should You Buy or Sell a 52-Week Low ?”  

  1. 1 Pradeep Bonde

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    Barry is completely wrong on this one. If you test DOW component stocks by buying at 52 week low you will find great success. Anyone who has done any serious market testing knows buying weakness has an edge.
    His other statement never to buy former market leaders also is very misleading because the market leaders that survive a bear market come back and can make moves upwards of 300% from bottom. Look at SNDK. YHOO, AMZN, AAPL, MNST and so many others.
    No wonder he is a CNBC guru.

  2. 2 Babak

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    Pradeep: There was a book which had a very simple and similar idea. Take the stocks in the Dow, buy the one with the worst performance at the end of the year and then sell it in one year. Rinse and repeat. Historically buying weakness over a long time interval (say a year) has been a good strategy.

  3. 3 Barry Ritholtz

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    James suggested Nasdaq 100

    Pradeep suggest the Dow.

    Everyone seems to be very good at disproving what I didnt say. How about responding to my original claim? Buying stocks making 52 lows is an overall losing strategy.

    More on this tomororw.

  4. 4 HoundDogOne

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    This is incredibly simplistic…
    Maybe a “strategy” for Grandma… not a pro trader.

    To use a single stock as an example…
    Or even a subset of the DJII is misleading at best.

    Let’s do the math for Enron. Or WorldCom.

    The biggest danger with “52 week lows”…
    Is that these stocks are often on their way to ZERO.
    Sophisticated players have long since bailed out…
    Leaving the little people holding the bag.

    As for EBay…
    They have the worst customer service in American history…
    Are hated by both buyers and sellers… just go to epinions, my3cents, etc
    This is a BIG RED FLAG.

    You are not protected in any way..
    So buying anything over $100 to $200 is nuts.

    EBay could never withstand a challenge from someone like GOOG…
    Because GOOG has computer costs roughly 50% of EBay..
    And a reputation for integity that EBay will never regain.

  5. 5 HoundDogOne

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    Just to elaborate…
    I have all price data for all stocks for 10 years…
    Sitting on my network.

    I could simulate buying any stock at a 52 week low…
    Holding for 3-6 months…
    While shorting any stock that hits a 52 week high…
    And holding for 3-6 months…
    (A very well hedged portfolio)…
    I could code and run a simulation in ** one weekend **…
    And see how profitable it is.
    Could make it as complicated as you like.

    But so could about 10,000 players or institutions globally.

    So it’s a ** waste of time **…
    Because if 52 week lows/highs were “market inefficient”…
    Those 10,000 players would have arbed it out a long time ago.

    The only thing you are on to…
    That is potentially a ** very profitable ** risk arbitrage…
    Is all those Canadian income trusts…
    But transaction costs are likely too high for Canadian securities…
    To bother with… when you have the US market sitting there.

  6. 6 Babak

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    HoudDogOne: I’m not sure what you mean when you refer to the Cdn income trusts. How are they related to this? I agree Cdn costs are too high rel. to US but they are coming down fast.

  7. 7 James Altucher

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    Babak! Thanks for the mention.

  8. 8 Ken

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    I would assume someone using this strategy also do homework on the stock.
    This would cover for the “on the way to ZERO” risk.

    Of course there is the wise say that one should not catch the falling knife.

  9. 9 keith piccirillo

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    Nice article.
    The only way to buy a 52 week low is to analyze the fundamentals to death, and see WHY it has dropped to current levels. Most online retail internet purchases follow the same seasonal trend as Ebay, and much more people than ever before purchase for holidays online.
    Read and listen to the quarterly conference calls like Cramer says. I don’t go to the casino and I wouldn’t buy 52 week low stocks.
    First disprove with quality assumptions why its tanking and then the institutional dislike for your stock pick may change.

  10. 10 dan

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    You’re showing a very significant bias with your analysis. I recommend the book Irrational Exubarency by Shiller, where he describes a number of biases in detail.

    The August price of 37 was not a 52-week low.

  11. 11 piyush modi

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    interesting bit. I totally believe in the not buying 52 week lows, cause as someone says here quite often they are going to 0 from there or to oblivion. But this does provide a different perspective. Buying 52 week lows in index stocks might be profitable. Simply cause the chance of it being a case of cyclical fall and not on its way to 0 be much greater here. There would still be a few which would end up dyeing, but the proportion would be much less. A filter could be that as and if they are removed from the index, one should sell them from their portfolios. I have seen it a lot here in India. Large underperforming sectors find their day in the limelight once or the other. Each bull market is lead by new stocks and sectors. But the thing is that it rarely happens that stocks, even index stocks hitting 52 week lows turn around and start bull markets immediately. That usually happens after say they have spent maybe 2-3 years in the wilderness.

    The phenomenon here might be more of a trading bet, that portfolio managers might shift around money and that would lead to a bounce which leads to 1quarter performances of these stocks being greater than the market. Well, if there’s money to be made I don’t mind, even if its a trading bet.

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