Some Street.com readers criticized the "never buy a stock making a 52 week low" statement made previously in this space.
I strongly believe that it is solid advice.
To reiterate why, stocks in down trends tend to stay in downtrends for much longer than most people estimate. Since we do not know when technically weak stocks — those under institutional distribution — will stop being sold by the big boys, a 52 week low purchase is merely a guess that the selling is just about finished.
A few specifics: Since that May 18 post, eBay is down 25%. Since we trashed Dell in March, they are off 40%.
The best performer has been Microsoft, which is flat since I posted on it (but down about 12% since I wrote it the night before). Incidentally, its worth noting that Oracle is making 52 week highs today.
I cannot take credit for the "Don’t buy 52 week lows" rule, so this is not crowing — rather,
it is to point out that a well crafted technical rule which has been
historically proven to have value is not to be so blithely ignored.
One last rule: Be careful following the investments of billionaire and others. And as we noted when Michael Dell made a $70m stock purchase, it was the equivalent of you or I buying a 100 shares.
Dell made his investment, it has lost almost $14 million dollars —
about a 20% whack. Luckily, he can afford it — but I doubt many readers
could. Regardless, it is
a valuable reminder that billionaires can do things we cannot. You should think
twice before following someone else whose finances and risk profile is
very different from your own . . .
On a final note, buying the former market stars from previous bull markets has not proven to be a successful investment strategy.
UPDATE: July 21, 2006 2:21pm
What follows is what I can only descibe as the single dumbest email I ever received; Since it was signed kojak <firstname.lastname@example.org>, I can only hope its a goof.
Here it is in its entirety:
If no one bought 52 week lows, wouldn’t a stock go to zero everytime?
Its ludicrous to suggest nobody should buy lows. Doesn’t someone have to? Of course they do. Thats what makes a market Bazza! Out
Why do I have a sneaking suspicion that "Telly" is serious?
UPDATE: July 22, 2006 8:21am
Dave Merkel asks:
"Barry, is there some sort of cutoff for where you might buy a stock above the 52-week low? Does it have to be 10% above, or some other criterion?"
Its not the lows, but what they mean: I advise individuals not to buy stocks making 52 week lows for a wide variety of reasons — these stocks are:
• often in a down trend
• frequently part of a negative sector or group
• may have fundamentals that may be decaying
• possibly in markets that may be in a confirmed bear
The 52 week low data point is usually a manifestation of these other issues;
For most investors, its better to miss that first 5-10% move off of the bottom and wait until a trend is re-established.
Consider HP: It had quite a few false bottoms and fake reversals — but you could have picked it up in early 2005 ~$20 and watched it gain 50%.
No, you didn’t bottom tick it, but think of how much damage investors bottom fishing the likes of AOL, CSCO, EMC, DELL, INTC, LU MSFT, SUNW, NT, QCOM, YHOO, etc. did to themselves.
Never say never, but for most retail investors (and quite a few funds) they may bve better off saying "extremely rarely."
Again, great commentary and advice, Barry. Thanks!…
I just can’t believe there have been so many false signals given in this market. From all the crash & disaster omens to the huge >90% upthrust days indicating potential bottoms and a significantly higher market weeks/months out.
Something has to be said about a whipsaw market of this magnitude.
That said, I bet a good number of people are surprised to see their puts so in the money today, which may result in put selling later in the day hopefully bouncing the market up unexpectedly.
What’d be nice is if we had a statistically relevant sample to test the theory one way or the other. Surely someone has done this work. It’s not that I don’t believe it, I just don’t believe anything until I see the data.
I know of been getting slaughtered by FDG. I didn’t enter at the 52-week-low however. Down 20%. Debating whether to jump or sit and collect the dividend.
Many value investors start their days reading the 52 week low list. Price momentum, if you are a patient and long-term oriented investor, is not nearly as important as price relative to fair value. I don’t think anyone would recommend running out and buying stocks at their 52 week lows just out of principal. However, if you can pick up a stock at less than fair value, or even better, less than book or real asset value, then one can feel much more at ease when picking up a position at a 52 week low. Downward momentum, if it continues, simply represents an opportunity to pick up an undervalued asset at an even more attractive price.
Rick Santelli observed this morning that treasury yields have only been inverted relative to fed funds four times in the last 20 (?) years…what he didn’t say was what this bodes for the market historically.
I’m constantly amazed at how willing people are to buy a stock just because an insider is buying. Your DELL example is a great one. TIE is another recent example which I think will end the same way…if not worse.
Disclosure – I have no position in TIE at the moment but I short it every chance I get. :-)
Ah, TIE. I remember when it was a contrarian reversal play in the low single digits. I sold and missed the runup; foolish me, sticking to my valuation discipline, huh?
FD: I’m not shorting TIE, but I’d consider it at some point. Been busy covering homebuilders and moving those shorts into the brokers on their bigger pops.
You do a nice job on the blog Barry, but I can’t say that I’m a fan of dogmatic advice like this. Rarely might be a better descriptor than never. Some firms with (relatively) safe dividends that had appreciably higher yields than the 10 year Treasury last autumn deserved to be bought. Especially those that were most hated or ignored, like the big telecoms. Buying T or BLS at its 52 week low last November and selling it today made for a sweet return. If only I had the nerve to do it with greater size!
Kevin, I was just about to point out that October and November can often be good times to shop the low list as the institutions and mutual funds dump their losers and investors take their tax losses. You never know when the last big sale of shares will hit however so a trailing buy stop above the market might be the way to go. “If they don’t go up, don’t buy ’em!”
How about buying stocks at 51 weeks? Is that okay?
Would cvsix or a long short fund be a good place to weather the storm if one should hit? Hope someone will help….. I find this site amazingly insightfull. Barry must be proud!
>>>How about buying stocks at 51 weeks? Is that okay?<<< Yes, you're returns will be extraordinarily better.
I would feel more superior to the people who broke this rule and bought HPQ when it was a a multi-year low back in 2002 if they hadn’t ended up almost tripling their money over the next few years.
BR Don’t take one stock at its low — look at the unholy list of bottom fishing purchases made over the past 5 years: CSCO INTC SUNW EMC LU NT MSFT DELL AOL (TWX) PFE etc. etc.
You are always better off waiting for a stock to reassert itself and establish a postive trend. This may mean missing the 1s move off the lows — but so what?
Your HP example — there was plenty of time to buy it once it established its uptrend. You could have bought it in early 2005 when it broke over 20ish.
Who love’s ya baby. Howsa bout the last crew who told you Broadcom was washed out at $30ish. Next time you are on with the 5th/3rd team, make sure you commend them on their calls to be in emerging markets and AMD. Prescient.
Looks like the next stop of support is a congestive 18-22ish. I’m not a buyer of any of this garbage but this will not continue forever. At this rate of descent Telly is right. BRCM will in fact go to zero in two more months.
Maybe this is the end of times?? Anyone get any direct signals from the man upstairs lately? Is he planning something big?
Anyone get any direct signals from the man upstairs lately? Is he planning something big?
BDG123, he’s probably waiting to see what the Fed does.
Barry, here’s a slightly OT (for this thread) article from the Australian that really rips into Bernanke more than I’ve seen US news sources willing to do.
Great blog, great comments (and great spam/troll filtering!), but at 25 years old and an engineer by trade I’m still far behind the learning curve. May I occasionally interject to ask an ignorant question of the commenters? I promise not to ask any stupid ones, nor will I involve politics.
never catch a falling knife….. look around, it’s raining knives right now
BTW, I recently read an article/thread, perhaps here, that discussed how poorly timed most companies’ buyback programs were. Does anyone have a link to show the historical (in)significance behind stock repurchase announcements? This may provide yet another guideline that a repurchase at/near a low doesn’t have much useful significance.
You should only buy a stock at a 52 week low when Cramer says to short it. /sarcasm
YESTERDAY’S STARS ARE TOMORROW’S DOGS!
How about the 104 week low? Same theory applies?
Has the market just experienced a “dead cat bounce”? Or should we call it a “Bernanke bounce”?
My goal is being the one to buy the last 52 week low.
Since you keep referring to your commentary on Michael Dell’s buy, I have to get my two cents in… It’s not like the average person buying 100 shares, it’s like the average person worth a total of $1.1 million and owns 50,000 shares of Dell buying 100 shares (I didn’t actually match up holding percentages here, but you get the point).
…close under put strikes in many stocks – typical for bear market. Put writers could not make it this time. they were close, but not close enough. QQQQ looks really bad. Monday when postion actually are getting closed can be rather ugly. We will find out how many puts were naked.
Another example of the same sort as the Michael Dell purchase. note:SIRI at 3.90 today
Mel Karmazin Buys $4.5M in Stock
According to a new SEC filing, SIRIUS CEO Mel Karmazin purchased 1 million shares of SIRIUS stock Tuesday, valued at nearly $4.5 million.
This isn’t the first vote of confidence by Karmazin. In January he put his own money on the line, buying a million shares for $6.21 each.
bold type beware
end bold type
There were two unclosed tags.
BR My bad — I fixed it above
Folks, the evolving reality is that we are in a bear market and it is foolish to try to buy anything off of the bottom because we are not there yet and won’t be for some time to come. If and when this reverses, there will be plenty of time to go long and there isn’t any reason to “snap up bargains” until the cyclical trend has run its course.
Those of you who ignore charts are sailing without a map and likely to make some serious errors. There isn’t anything magic about TA, but it does tell you where the market sits and where it is likely to go. What I see now is a confirmed bear at the weekly level, to be followed shortly by the monthly level, which means trying to trade against it is enormously high risk for the foreseeable future, especially with a secular bear in the background.
Bottom doesn’t mean lower than last week, it means bottom. Go look at a weekly QQQQ chart back into 2000 and count the bottoms over the next two years. The cyclical bottom will be in when the rookies have had their asses handed to them (again) and are out of the market and most of the talking heads are whining that the Fed should “do something about this disaster.” The secular bottom will be in when Dow p/e’s are in the 6-8 range, maybe in 2010.
“There were two unclosed tags.”
good eye, MZ.
Even during the first phase of the secular bear there was money to be made in energy and real estate. Where will the money be made during the next phase of this secular bear?
Also, as an aside, I’d be inclined to think the bear market won’t be over until the P/E Supercycle cited by Bronson plays itself out with a bottom in 2014. Barry had linked to the Bronson study a month or so ago.
Should You Buy or Sell a 52-Week Low ?
Barry Ritholtz at The Big Picture had a recent comment about never buying a 52 week low. As you might expect, such absolutes simply don
You know when to buy or sell stocks from 4T stock trading strategy. Thats the tall figure in African Am…
Ok. So don’t buy stocks making 52-week low?
What about 52-week high?
My opinion is that it MAY BE profitable to buy stocks making 52-week low as long as your risk/reward structure justify it.
Just make sure your profit target is > your max. loss