Industry Information and the 52-Week High Effect

The authors find that portfolio managers may exploit the 52-week high strategy may be more consistent and profitable with industries than individual stocks. They also find that institutional investors buy stocks that are close to 52 weeks highs and sell stocks that are close to 52 week lows.

Abstract:

We find that the 52-week high effect (George and Hwang, 2004) cannot be explained by risk factors. Instead, it is more consistent with investor under-reaction caused by anchoring bias: the presumably more sophisticated institutional investors suffer less from this bias and buy (sell) stocks close to (far from) their 52-week highs. Further, the effect is mainly driven by investor under-reaction to industry instead of firm-specific information. The extent of under-reaction is more for positive than for negative industry information. A strategy that buys stocks in industries in which stock prices are close to 52-week highs and shorts stocks in industries in which stock prices are far from 52-week highs generates a monthly return of 0.60% from 1963 to 2009, roughly 50% higher than the profit from the individual 52-week high strategy in the same period. The 52-week high strategy works best among stocks with high R-squares and high industry betas (i.e., stocks whose values are more affected by industry factors and less affected by firm-specific information). Our results hold even after controlling for both individual and industry return momentum effects.

Source: Hong, Xin, Jordan, Bradford D. and Liu, Mark H., Industry Information and the 52-Week High Effect (March 15, 2011). Available at SSRN: http://ssrn.com/abstract=1787378

This paper is related to The 52-Week High and Momentum Investing