Investor sentiments are shifting to bullish as the economy continues to improve. Inflation is slowly decreasing while indices are experiencing growth. As a result, investors are leaning towards strategies that can help them find the next market leader. Usually, they look out for companies that are breaking out of consolidation or reaching their bottom. However, there is one strategy that some may hear the most in bull markets rather than a recovering market: a system that capitalizes on prices continuously moving up without any signs of falling. Let me introduce the 52-week high breakout strategy.
What is a 52-week high breakout strategy?
The 52-week high breakout strategy means buying a security that either closed above its 52-week high price or one that trades near its 52-week high. The central premise behind the system is that the “52-week high effect” on any security tends to generate more returns than those trading far from the 52-week high. According to the paper from Bauer College of Business, the 52-week measure provides better returns when compared to traditional momentum strategies.
How do you trade the 52-week breakout strategy?
Investors can capitalize on the 52-week high in many ways, whether you wait for the breakout or anticipate the breakout by entering near the 52-week high. It will depend on your aggressiveness and risk appetite. The most important thing is finding which securities are trading near their 52-week high. We’re in luck because most financial websites have screeners to sift through companies that meet your criteria quickly.
Let’s say you've filtered for companies within the 5-10% of their 52-week high. Once you’ve identified them, you can wait for prices to form a pattern or get signals from your entry strategy.
Now let’s look at some securities trading near their 52-week high.
Caterpillar Inc. (CAT)
Caterpillar, Inc. manufactures and sells construction and mining equipment, machinery, and engines. The company was founded in 1925 and headquartered in Irving, Texas, U.S. Caterpillar is the world’s leading construction and mining equipment producer. Caterpillar’s primary services are:
- Customer Value Agreement Services
- Financial Services
- Safety Services
- Job Site Solutions
- Equipment Training Solutions,
- Maintenance Services
CAT recently started treading new price levels after breaking out of its 52-week high, finishing 8.85% higher than yesterday’s close during an uncertain trading day. Investors are betting on the stock due to better-than-expected Q2 2023 earnings and favorable profit guidance for the rest of the year.
Barchart Opinion
Based on its combined multi-period technical indicators, Barchart’s opinion rating gives CAT an 88% buy. The rating suggests it has a solid direction to the upside and strengthening trend strength.
Gorman-Rupp Company (GRC)
The Gorman-Rupp Company is a pump and pump systems manufacturer that caters to several industries like construction, water, wastewater, heating, and other related fields. GRC’s product line is sold in 130 countries worldwide and comprises various pump sizes. Their pumps have a capacity range of 1GPM (gallon per minute) to nearly 1 million GPM and are powered by drives that range from 1/35 horsepower to several thousand horsepower.
Barchart Opinion
Like CAT, Barchart’s opinion rating on GRC is also an 88% buy based on its combined multi-period technical indicators. Besides the bullish direction and strength, the snapshot info on its opinion shows how GRC has already been steadily moving up in a solid bullish direction from its 56% buy from last month.
Msa Safety Inc. (MSA)
MSA Safety Incorporated is a safety products and software manufacturer that caters to infrastructure and people. MSA’s products are being used by different markets ranging from construction, mining, oil, military, and fire service, just to name a few. The company’s customers fall into two categories: distributors and end-users. Its product line includes:
- Breathing apparatus
- Gas and flame detection systems
- Head protection products and protective apparel
- Electronics and mechanical systems for hazardous situations
Barchart Opinion
Barchart’s Opinion rating gives MSA a 100% buy and is part of its “Top 1%” stocks with the most robust signal strength. With its consecutive highs, no wonder Barchart’s opinion rates it high.
Final Thoughts
While the 52-week high breakout strategy offers good returns, it is imperative that investors and traders back-test it first before implementing it into their trading arsenal. Like any other strategy, it carries risk, and understanding the risk lets you make informed decisions when trading. Risk management should always come first to survive in the fierce financial jungle.
On the date of publication, Rick Orford did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
