Stocktake: Investors shouldn’t be afraid of 52-week highs

Some investors may be tempted to take profits when their stock is approaching a 52-week high. However, a recent study suggests the share price is often too low, not too high, at such junctures.

Technical analysts see 52-week highs as potential resistance levels, where you can expect more sellers than buyers. Some observers see technical analysis as bogus, but the study, which examined Finnish stock-price data over the period 2000-14, suggests otherwise.

It found selling pressure roughly doubles when a stock is near 52-week highs. Investor psychology takes over, with shares less likely to react to fundamental news.

This has important implications. Previous research has found that stocks near 52-week highs tend to continue upwards over time. The likely explanation is that increased selling pressure, particularly among uninformed investors who are anchoring to the old high point, “slows the incorporation of recent good news”.

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The 52-week high "acts as a driver of uninformed selling", leading to a "dampening" of the price-discovery process. Stock prices can be less efficient near 52-week highs; this gets corrected over time, resulting in a gradual upwards price drift. The study is at papers.ssrn.com