52-Week Highs in Today’s Stock Market – Commonplace, but a Useful Buying Tool

Wednesday, March 24, 2010

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:

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 US stock indexes through last Friday:

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 – A Way 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:

Shaded are the five companies I highlighted in previous write-ups: Boeing (BA), Caterpillar (CAT), Coca-Cola (KO), Intel (INTC) and Wal-Mart (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’ pullbacks from their highs can be a useful buying tool.

One Caveat: In “Long Ignored, ‘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.

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March 2010