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A further examination of the 'buy at 52 week high' rule.

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