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The Industry 52-week High Effect

Posted in Momentum Investing, Technical Trading

Are 52-week highs and lows useful equity price momentum indicators at the industry level? In their March 2011 paper entitled “Industry Information and the 52-Week High Effect”, Xin Hong, Bradford Jordan and Mark Liu compare the 52-week high effect for industries to that for individual stocks. This effect consists of the future outperformance (underperformance) of stocks currently near their respective 52-week highs (lows). Using monthly closes and rolling 52-week (intraday) highs for all stocks listed on NYSE, AMEX and NASDAQ and 20 value-weighted industry indexes constructed from SIC codes for these firms over the period July 1963 through 2009, they find that:

  • Comparing 52-week high effects for industries and individual stocks:
    • A hedge strategy that each month buys (sells) the equally weighted stocks in the top (bottom) six of 20 industries ranked by ratio of current index level to 52-week index high and holds for six months generates an average gross monthly return of 0.60% over the entire sample period.
    • For comparison, a strategy that each month buys (sells) the equally weighted 30% of individual stocks closest to (farthest from) their respective 52-week highs and holds for six months generates an average monthly gross return of 0.43% over the same period.
  • The contribution from the long side of the industry strategy is about twice as big as that from the short side.
  • Excluding January sightly (dramatically) increases profitability for the 52-week high strategy as applied to industries (individual stocks). Conversely, the strategy generates an average return of -0.94% (-7.62%) in January for industries (individual stocks).
  • The 52-week high strategy works best among stocks with relatively high industry return correlations and betas (stocks more affected by industry factors) and does not work among stocks with low industry return correlations and betas.
  • Sophisticated institutional investors, unlike typical investors, buy (sell) stocks whose prices are close to (far from) 52-week highs.
  • Results are mostly robust over subperiods, to exclusion of the Internet bubble and recent financial crisis, for 3-month and 12-month holding intervals, and after controlling for common equity return factors (market, size, book-to-market, momentum).

In summary, evidence indicates that investors may be able to exploit the 52-week high strategy more profitably and consistently for industries than for individual stocks.

Cautions regarding findings include:

  • Reported returns are gross, not net. Including reasonable trading frictions would dent returns, but the relatively long six-month holding period mitigates.
  • Forming the portfolios tested economically requires a large amount of capital.
  • Statistical significance tests assume tame return distributions. To the extent that actual distributions are wild, the meaning of the tests breaks down.

See “The 52-Week High as a Momentum Indicator for Individual Stocks” for findings of the key predecessor study.

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