As we mentioned in the first part of this series, there have been academic studies which have shown that stocks trading near new highs tend to follow through. Click here to read Part 1
We’d like to share two of those studies with you. The first was published in the Journal of Finance The 52 Week High and Momentum Investing by Thomas George and Chuan-Yang Hwang. In this study the authors stated the 52-week high price explains a large portion of the profits from momentum investing. Nearness to the 52 week high dominates and improves upon the forecasting power of past returns for future returns.
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Three years later, two professors from Rutgers University published a study which found the same behavior to be true.
Each of these studies pointed out that because these stocks are so well publicized, the broader public is more aware of them and this awareness often leads to higher prices.
In the next lesson we’ll share additional findings with you. Not only are these professors correct, the gains seen in many of these stocks – when entered correctly – have been substantial for over the past decade.