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Buying 52-Week Lows

03/07/08 12:29:18 PM
by Mike Carr, CMT

With the S&P 500 hitting a new 52-week low, bears have the upper hand in market action.

Security:   SPY
Position:   Sell

On March 6, 2008, the Standard & Poor's 500 dropped to its lowest level in a year. Looking at the S&P 500 exchange traded fund (ETF) (SPY), we found that this has happened 13 times since 1990. If we had bought each time that occurred and held our investment for periods from one to 52 weeks, the results would have been mediocre, at best. The net profits from buying new lows and selling at the end of each time period are shown in Figure 1.

FIGURE 1: SPY. Buying new 52-week lows and holding for periods from one to 52 weeks shows a mix of winning and losing time frames.
Graphic provided by: Trade Navigator.
For comparison, we tested buying SPY at a random time and holding for the varying time frames illustrated in Figure 1. These results are shown in Figure 2.

FIGURE 2: SPY. Randomly buying the SPY is usually profitable for holding periods up to a year.
Graphic provided by: Trade Navigator.
The results are dramatically different. A random buying decision is likely to have been a profitable trading strategy since 1990. This simple test indicates that the current market environment is a high risk time for stocks. Long-term investors should consider increasing cash. Traders should look first for short opportunities. Shorting SPY is a high-probability trade at this point.

Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."

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