Which stocks are nearing their 52-week high right now?
As per Equitymaster's Indian Stock Screener, these stocks are about to hit their 52-week high.
The 52-week high is the highest price at which a stock has traded during the time period that equates to one year. It is commonly used by investors and traders alike as an important indicator.
There are other parameters you should take into account as well before forming a hard opinion on the stock.
Should you invest in stocks that are at their 52-week high?
A stock trading at its 52-week high does not guarantee strong returns. There's a good chance that it may be overvalued.
Stocks making new 52-week highs are often most susceptible to profit taking, resulting in pullbacks and trend reversals.
However, a 52-week high also indicates bullish sentiment. Investors that follow momentum investing use the 52-week high to find buying opportunities in an uptrend.
Momentum investing is built on the premise where investors buy outperforming securities and avoid or sell underperforming ones.
What are the different types of momentum investing?
Momentum investing can broadly be classified into two categories - relative momentum investing and absolute momentum investing.
- Relative momentum investing
In this, investors compare the relative performance of securities and buy outperforming ones and avoid or short-sell underperforming ones.
They then rebalance their portfolio at intervals and rotate between a subset of securities.
Relative momentum is also known as cross sectional momentum investing. - Absolute momentum investing
In this, investors compare a security against its own historical performance. They buy securities that have delivered positive returns and sell securities that have delivered negative returns.
Absolute momentum is also referred to as time-series momentum or trend following.
The difference between the two is that in relative momentum, one does not take into account whether the returns are negative or positive. If all securities are losing value, investors will still invest in assets that are falling the least.
On the other hand, in absolute momentum, the direction of returns play an important role. Investors will avoid stocks that have delivered negative returns and only invest in those that have delivered positive returns.
Does momentum investing work?
Momentum investing can work, but it may not be practical for all investors.
There is a lot of evidence, academic and otherwise, proving momentum investing works.
However, one has to perfectly time the market, manage positions and have risk management in place in case things take a turn for the worse.