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troylau
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Ph.D Physics University of Michigan
  • A further examination of the 'buy at 52 week high' rule. 0 comments
    May 10, 2011 10:13 PM

    Two weeks ago, I demonstrated that the simple strategy of buying any stock at a 52 week high provided the fanciest of returns.

    http://thequantinvestor.blogspot.com/2011/04/how-to-lose-money-by-buying-lowor-make.html

     

    I expanded on that last week and showed some amazing gains with a refined strategy.

    http://thequantinvestor.blogspot.com/2011/05/perfecting-strategy-of-buying-high.html

     

    In response, I was asked by many readers if there were any specific sell rules, besides waiting a specific amount of time. There wasn't. To respond to my readers, in my post this week I'm going to examine whether, if by implementing a simple 'sell rule', we can further improve upon this already nice performance. For my sell rule, I'm going to implement William O'neil's hard and fast law of selling any stock that has taken an 8% loss, which is followed by many.

     

    To implement my strategy I'll use my same rules as last week:

     

    1. Buy any stock that is at a 52 week high

    2. Hold for a specific period of time (1, 3, or 6  months I'll look at here)

    3. Sell after that amount of time, or keep if it is still at a 52 week high

     

    and I'll add another rule

     

    4. Sell if, at any point, the stock drops me below an 8% loss (this INCLUDES intraday prices). To make it even more realistic I'll assume 1% slippage meaning I take a 9% loss when trying to sell at an 8% loss.

     

     

    1 Month Hold

                     1 Year performance       Avg. Return

     NYSE                   +7.4%                     0.6%

     Nasdaq                 -9.0%                    -0.8%

     Amex                   -13.5%                   -1.2%


    3 Month Hold

                     1 Year performance       Avg. Return

    NYSE                    9.95%                     2.4%

    Nasdaq                  2.8%                      0.7%

     

    Amex                    -1.6%                     -0.4%


    6 Month Hold

                     1 Year performance       Avg. Return

    NYSE                    8.4%                     4.1%

    Nasdaq                 3.6%                     1.8%

     

    Amex                    0.4%                     0.2%


    As you can see, the implementation of a simple sell rule, in fact, truly hurts our performance. This makes for an interesting point of discussion...if sell rules truly work. In all my experimentation, I've found them to have very little effect. If I remove the slippage effect, the gains become comparable to the normal strategy, but still under-performing.


       Troy

    Themes: sell rule, buy high
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