Blog - Investing Notes
May 23, 2007 - The 52-Week High as a Momentum Indicator for Individual Stocks
A reader notes and asks: "It is frequently said that stocks at 52-week highs are the most likely to outperform in the future. Is there any academic evidence to support this assertion?" In their October 2004 Journal of Finance article entitled "The 52-Week High and Momentum Investing", Thomas George and Chuan-Yang Hwang examine the explanatory power of the 52-week high in the context of momentum investing. They compare the 52-week high as a momentum indicator to benchmark momentum strategies that employ six months of past returns to forecast six months of future returns. Using price data for a broad range of stocks over the period 1963-2001, they find that:
- Based on raw returns across the calendar year, nearness to the 52-week high is comparable to other momentum indicators in forecasting future returns. (See the first table below.) In fact, a large part of the profit from long/short momentum strategies based on past returns comes from stocks whose prices are close to/far from their 52-week highs.
- Proximity to the 52-week high has predictive power whether or not stocks exhibit past return-based momentum, suggesting that price level may be more important than past price change in explaining momentum.
- A 52-week high momentum strategy outperforms other momentum strategies for January-segregated returns. (See the second table below.)
- A 52-week high momentum strategy generates risk-adjusted (for market capitalization and liquidity) returns about twice as large as those associated with other momentum strategies. The outperformance is even larger outside of January.
- Future returns predicted by the 52-week high do not reverse in the long run.
- Results are robust to calculating momentum based on 12 months of past returns rather than six months, and to using 12 months of future returns rather than six months.
The following table, extracted from the paper, compares average monthly returns during July 1963 through December 2001 for winner and loser momentum portfolios held for six months after formation:
- Jegadeesh–Titman (JT) winner (loser) portfolios are the equally weighted 30% of stocks with the highest (lowest) past six-month returns.
- Moskowitz–Grinblatt (MG) winner (loser) portfolios are the equally weighted top (bottom) 30% of stocks ranked by the six-month value-weighted return for the industry to which the stock belongs.
- 52-week high winner (loser) portfolios are the equally weighted 30% of stocks with the highest (lowest) ratio of current price to 52-week high.
The average monthly return for zero-cost portfolios that are long winners and short losers is about 0.45% for all three strategies. A large part of the JT strategy profit comes from stocks with prices close to and far from their 52-week highs.
The next table, also extracted from the paper, emphasizes the criticality of a January effect to two of these three momentum strategies. It shows that momentum effects tend to reverse in January, such that long-short momentum portfolios generate larger returns for February through December but lose money in January. Said differently, loser stocks (but not loser industries) rebound in January. The table also shows that the January-segregated 52-week high strategy results are stronger than those of the other two momentum strategies.
The authors interpret these results as follows: "Traders appear
to use the 52-week high as a reference point against which they evaluate
the potential impact of news. When good news has pushed a stock’s
price near or to a new 52-week high, traders are reluctant to bid the
price of the stock higher even if the information warrants it. The information
eventually prevails and the price moves up, resulting in a continuation.
Similarly, when bad news pushes
a stock’s price far from its 52-week high, traders are initially
unwilling to sell the stock at prices that are as low as the information
implies. The information eventually prevails and the price falls. In
this respect, traders’ reluctance to
revise their priors is price-level dependent. The greatest reluctance
is at price levels nearest and farthest from the stock’s 52-week
high. At prices that are neither near nor far from the 52-week high,
priors adjust more quickly and
there is no pronounced predictability when information arrives."
In summary, the 52-week high is on average a superior indicator of positive momentum for individual stocks (except for a January reversal).
As counterpoint and caution, see our blog entry of 3/8/07 summarizing more recent research concluding that the momentum effect died in 2000 after a fairly reliable 60-year run.
For related research, see Blog Synthesis: Momentum Investing/Trading.
