Buying Stocks at 52 Week Lows

Over at Barry Ritholtz's blog there has been alot of discussion lately about buying stocks whose price has hit 52 week lows. Barry is one of the few public figures on Wall Street who gets "it". His blog is a good read on most topics other than Microsoft's business outlook, eventual demise to freeware and inability to innovate. Got that Barry? :)

Why is it that more on Wall Street who get it aren't trotted out for public consumption? I could never figure this out. Is it because Wall Street truly wants the public to be clueless as many have stated? Or is it that most on Wall Street really don't get it as the old 80-20 rule predicts? (80% of investment professionals are subpar or worse. A surety in the deflation of many egos and inflated salaries.) Based on my twenty years of business experience, my vote is Pareto was right. I do know there is a desire to keep secrets on Wall Street. Quantitative work done by mathematicians, physicists, engineers and other technically inclined people are usually reserved for proprietary trading desks and extremely wealthy clients.

To digress a moment on this topic, I recently had a Vice President and CFA at Merrill Lynch tell me their private equity group had access to the same information as Goldman Sachs' proprietary trading team. I didn't even respond. He didn't get it and it wasn't worth it. Between him and I there was enough energy in the room to power a sixty watt light bulb. The intellectual capacity developing strategies at Goldman has enough energy to light the eastern seaboard. They aren't MBAs or finance degrees either. Another validation of the 80-20 rule as Wall Street covets both. (More on that in a later post when I profile the greatest quantitative trader of our time.)

Anyhow, back to the discussion of 52 week lows. I understand what Barry is stating. He wants to buy strong stocks not dogs and that is generally true. Yet, there is a time to buy dogs and you need to understand the cycle fundamentals to know which 52 week lows to buy or have the quantitative tools to make the best investments. I prefer mathematical tools because math doesn't have an opinion but either approach is valid if you take the time to become a subject matter expert.

Above is the chart of a stock I have profiled more than any other on this blog: Phelps Dodge. Why? Because I am enamored with this stock. It has the most powerful normalized positive volume of nearly any large cap stock this cycle. It has been ridden hard and I believe it's going to be put away wet. Overlaid on the chart is normalized positive volume as I have outlined in prior posts. Any guess where you should have bought this stock? How about at or near its 52 week low in late 2002 or early 2003? Doing so would have yielded an incredible return this cycle. Per prior comments, there are three clear Elliott wave patterns on the price chart. There are also three clear waves on the normalized positive volume chart. On this particular chart I have also included a blue outline of volume to get a clearer picture of its direction. Positive volume peaked this last time when Phelps was violently up twenty percent then down twenty percent in a matter of a few weeks. A sign of a top? The 2006 prices look like a war zone with gaps all over the place. That is highly unusual on a weekly chart and tells an ominous story. One of indecision which is also validated by the many dojis which are highly uncommon in such large weekly clusters. There are enough graveyard dojis, inverted hammers, dojis, evening stars, abandoned babies and every other Tom, Dick and Harry bearish candlestick patterns on this chart to give one ample warning of impending risk. My goal is to stay clear of risk. Beyond risk, one can only use an educated guess at what will happen next.

Along those lines, will positive volume turn north for another leg up in the stock as it has in prior moves up this cycle? Or will it continue downward for months or longer with weak rallies? The moral of the story? Buy 52 week lows like everyone should have done with Valero, Phelps Dodge, Titanium Metals and Exxon Mobil but know why and when to buy them.

My next post will be using Phelps in a hedged strategy called pairs trading. The time is likely near to initiate such a trade. Until then, au revoir.