Using 52 Week Highs as a Useful Buying Tool

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 |  Includes: AA, AXP, BA, BAC, CAT, CSCO, CVX, DD, DIS, GE, HD, HPQ, IBM, INTC, JNJ, JPM, KO, MCD, MDLZ, MMM, MRK, MSFT, PFE, PG, T, TRV, UTX, VZ, WMT, XOM
by: John Tobey, CFA

Do a search for news reports containing the phrase, “52-week high,” and you will get about 5,000 hits. Check the latest Barron’s for new highs and lows (March 22, “Market Laboratory – Stocks,” page M-46), and you will find sixteen columns of companies in small type font.

The count: (Click to enlarge)

What’s the takeaway from such numbers? Nothing much. It’s just the natural outcome of the 52-week period moving through time – adding the latest week and dropping the oldest one. Those pre-March 9, 2009 highs are gone now. This graph shows the latest 52-week window for the major U.S. stock indexes through last Friday: (Click to enlarge)

Clearly, with “yesterday’s” highs setting the bar, any uptrend can produce many new “52-week high!” headlines. These announcements are of little use. However, 52-week high information can be an important buying tool.

How to use 52-week highs as a buying tool

In previous write-ups, I have mentioned that there are periodic mid-quarter/mid-month pullbacks that offer buying opportunities. As I explained in “Contrarian Buying: How to Increase Profit Potential and Risk Control,” making use of such periods can provide sizeable benefits.

To track pullbacks, follow prices relative to recent highs. In today’s market, the 52-week high, a common online data element, works quite well. Here, for example, are the 30 Dow Jones Industrial Average stocks as of last Friday’s (March 19) close: (Click to enlarge)

Shaded are the five companies I highlighted in previous write-ups: Boeing (NYSE:BA), Caterpillar (NYSE:CAT), Coca-Cola (NYSE:KO), Intel (NASDAQ:INTC) and Wal-Mart (NYSE:WMT).

What is a reasonable pullback level?

My rule of thumb for an attractive pullback is about 10% for the average stock (less for a fairly stable mover) and about 15% for an actively moving stock. Portfolios and indexes have less movement because their diversification means that, unless there is a movement en masse, individual stocks will move at different times and by different amounts.

So… We can expect to see many reports of new 52-week highs as this market uptrend continues, but the news will be of little help. However, watching our favorite stocks pullback from their highs can be a useful buying tool.

One Caveat: In “Upside Risk Returns – Is Buyers’ Panic Next?” I discussed how pullbacks could be muted if we entered a ‘buyers’ panic’ market. During such a time, many investors and lots of money trying to be invested mean any price weakness is pounced on as a buying opportunity.



Disclosure: No positions