Want to Buy Stocks Making 52 Week Lows? (Don't)

Friday, July 21, 2006 | 12:08 PM

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. 

Since 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 <telly@savalas.com>, 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."

Friday, July 21, 2006 | 12:08 PM | Permalink | Comments (34) | TrackBack (2)
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» Should You Buy or Sell a 52-Week Low ? from Trader's Narrative
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’t exist in trading. [Read More]

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You know when to buy or sell stocks from 4T stock trading strategy. Thats the tall figure in African Am... [Read More]

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Again, great commentary and advice, Barry. Thanks!...

Posted by: Michael C. | Jul 21, 2006 1:09:59 PM

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