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For only the 3rd time since March 2009, the S&P 500 closed last week at a new 52-week low. Naturally, the chatter among so-called “traders” was that this was an ominous sell signal.
Indeed, from Investopedia we find the following:
“A popular strategy used by stock traders is to buy when price exceeds its 52-week high, or to sell when price falls below its 52-week low. The rationale behind this strategy is that if price breaks out from the 52-week range (either above or below) there will be enough momentum to continue the price move in a favorable direction.”
When looking at the S&P 500, how would such a strategy have done going back to 1929? As it turns out: terrible. The S&P 500 (on a weekly basis), has closed at a 52-week low 4.5% of the time since 1929.
The average forward returns after such a condition were actually higher than returns following 52-week closing highs in the following periods: 1 month, 3 months, 1 year, 3 years, and 5 years. Only the 6-month forward return was lower in buying new 52-week lows vs. new 52-week highs (see Table below with highlighted box on the highest average return).
Since 1950, we find similar results. Selling new 52-week lows does not appear to be effective strategy.
How can this be? Well, your favorite trader is probably unfamiliar with the phrase “buy low” but it does tend to make sense for investors over time. And given that the average length of a Bear Market since 1929 is 15 months, by the time the market is making a new 52-week low it typically has already suffered a significant decline.
Now of course there are exceptions to buying new 52-week lows and expecting positive returns within the next few years. Among these, the Great Depression is the most glaring as it suffered a Bear Market that was 33 months in duration. If you believe that we are entering another Great Depression, then, perhaps selling the 52-week lows here will prove to be a good strategy in hindsight.
But be aware, even during the Depression by the time the S&P 500 closed at a 52-week low in November 1929 it had already lost over 33% of its value. As such, it was a much better buying point than the 52-week high reached at the peak in September 1929. And for savers with a 20+ year horizon, continuing to buy new 52-week lows from 1929-33 would prove to be a very effective strategy (average 20-year annualized return of 9.8% from such buys).
Food for thought next time you hear an arrogant “trader” telling you to sell new 52-week lows.
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This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of three award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors previously held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms.
Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.
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