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More on Stocks Making 52 Weak Lows

I mentioned earlier this week that I never buy stocks making 52 week weak lows:

Yahoo!, eBay, Amazon.com:  Interesting to note: All three web giants hit their 52 week lows today; Of the three, I find eBay intriguing -- especially if we slow down.

That said, there is never a reason to buy a stock making a 52 week low. Never.

That prompted an emailer (from TheStreet.com) to write:

"That kind of absolute statements such as "never buy a stock making a 52 week low" is what always makes me suspicious about your intellectual ability."

OK, so you can better understand both the point of my statement, as well as the philosophical underpinnings of this, here's the thinking (and I'll use small words so even the emailer can get it):  Any stock making 52 weak lows will ALWAYS be technically weak, and therefore undergoing a (possibly massive) institutional distribution. EVERYONE.

When will the hedge funds, pension plans, mutual funds and foundations be done selling? How the hell can you tell? I sure can't.

So let me ask you: Which 52 weak low will be the bottom?

That's not a spelling error or a typo, when a stock is making 52 weak lows, its because they are,well, weak.

Let's go to some charts:

DELL:  Which 52 Week Bottom Did You Buy?

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So I once again ask:  Why catch the falling knife?

Think about stocks making 52 weak lows as if you were short them: At what point would you cover?

Instead of merely guessing, consider using a down trend line or a 50 day moving average; I like to use a trailing buy stop . . .

Capiche?

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UPDATE March 22, 2006 5:45am

I discussed a "special situation" stock in the comments, and its worth going into more details on. My original statement is written with a bit of flourish to make a point: there is so rarely a reason to buy a stock making a 52 week low, that making it an exteme rule avoids lots of money losing mistakes.

Don't buy a stock merely because its making 52 weak lows, or because its cheap -- will save you from yourself 98% of the time.

If I was being perfectly honest, I would have written "almost never" -- but then the exceptions start swallowing the rule. I want to emphasize that its only in the very rarest of circumstances that I would even think about making those buys.  It is a slippery slope, and we would all soon be bottom fishing way too often and paying dearly for it.

I certainly would never buy a stock JUST BECAUSE I THINK ITS CHEAP, as those stocks tend to get even cheaper.

Micromuse is a great example: During the bubble, I sold Micromuse as high as $205. When the market cratered, I bought it back at $165, and quickly got stopped out. It was one of those "value stocks" I wanted to own. So I waited and waited and waited -- finally it was down to book value -- around ~$3 or so. I still waited.

One day, on no news, it just collapsed -- totally fell apart. Traded down to $1.43 or so -- profitable,  with $2 in cash! The hardly efficient market was saying a buck was worth only 75 cents.

I called Cody Willard, who told me he heard of a Janus telecom fund that was being folded into a larger fund -- everything in the telecom fund was being liquidated. That was the excuse that allowed me to buy MUSE as I could stand -- and in less than a year, it went to $10.

That is a very special situation -- rather than merely buying a stock making 52 week lows because of its "cheap" valuation   . . .

Sunday, May 21, 2006 | 11:15 AM | Permalink | Comments (13) | TrackBack (1)
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Comments

distribution is key. the spread between the multiples of different ownership requirements can be quite large, driving increased volatility.. it also changes depending on the general trend of multiples.
BR,
this is a very general question but do you (or anyone one else here) have any volume targets to tell you whether say momentum players have capitulated and into value hands? like if stock trades x% of float or average daily volume would that indicate that new ownership is taking over?
and i'm obviously speaking of a bottoming process...

Posted by: vf | May 21, 2006 11:18:13 AM