Who else is shopping there?

This article begins with a riddle. The chart below shows a stock that is up 28.9 percent between the end of 2021 and February 25, 2022. Of course, 28.9 percent over about seven weeks isn’t bad parenting. The riddle: what action is it? And how has it evolved since February 25?

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Many investors who had the stock in their portfolio on February 25 may have considered selling the stock after the sharp rise. And many investors would never have dreamed of investing in the stock at this high level. As is well known, the art of the stock market is to buy shares cheap and sell them expensive. Or not?

The stock, which had risen almost 29 percent to €107.08 on February 25 and already looked “very expensive” compared to previous prices, is now (April 4, 2022) above €200. Rheinmetall shares. Compared to the end of 2022, the role has now more than doubled. Rheinmetall benefited from the fact that the German state announced a sharp increase in defense spending, including a €100bn special fund, after Russia invaded Ukraine. The reason for the sharp price increase should not be of much interest at this time.

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When comparing both charts, you should also note that the Y-axis scale has changed. The price action on the second chart has been “squashed” further to show the full price increase on the chart. When looking at graphs, always keep in mind that the y-axis scale is variable relative to the x-axis.

As a general rule, very strong price movements like those of Rheinmetall have a fundamental reason: the earnings outlook for a company improves significantly. It is therefore logical that the value of the company and therefore also the individual shares into which the company’s share capital is divided increase in value.

Many private investors explicitly do not buy stocks that have risen much earlier. However, this can be a mistake that costs a lot of money. the boost effect ensures that stocks that have performed well in the recent past are often among the winners in the near future.

Several academic studies* have shown that, on average, stocks trading near their 52-week high outperform stocks trading far from it. This is consistent with the experience of many successful professionals such as William O’Neil, who in his CAN SLIM Strategy he also advises betting on previous winners and not losers in the stock.

Winners usually stay winners, losers usually stay losers. Of course, this is not always the case, and of course all trends reverse at some point. However, as a criteria for selecting promising stocks, it is generally worth looking for stocks that are trading near their 52-week high. It is often quite advantageous to wait for a small setback in such a stock to enter it. However, such stocks are often a much better investment than the “eternal loser” stocks.

at Stock Screener at Guidants you can have a specific display of stocks that have hit a new 52-week high (signal: “52-week high”) or stocks that are as close as possible to a specific period’s high, such as 52-weeks (with figure key: “distance from the top”). You can also see stocks that are at a 52-week low or near a significant low. This makes it easy to find stocks where you can speculate on the continuation of a trend after a breakout or on a trend reversal. The screenshot below shows Nasdaq 100 stocks trading near their 52-week high on April 4, 2022.

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(*Studies that have shown that stocks near their 52-week high tend to outperform stocks far from their 52-week high in the future include, for example, “The 52-week high and the momentum reversal“by Thomas J. George and Chuan-Yang Wang, as well as”Industry insights and the 52-week high effect” by Xin Hong, Bradford D. Jordan, and Mark H. Liu.)

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