Investors Show Bias Toward 52-Week Highs

Stocks near their 52-week high price exhibit higher liquidity than stocks far from that price point.

Stocks near their 52-week high price exhibit higher liquidity than stocks far from that price point. Liquidity in this case is defined as the ability to transact without impacting the price. The increase in liquidity is particularly concentrated on the sell side of the bid-ask spread.

Analysis of intraday trading data indicates this change in liquidity is caused by investors entering the market for behavioral, not informational or fundamental, reasons. Four well-known behavioral biases and effects were found to be at play: anchoring, disposition, attention and expectational error.

The analysis presented by the study highlights the 52-week high price as a strong candidate price for under-informed trading decisions, akin to studies of investors’ behavioral bias for trading in round numbers. These behaviors indicate informational inefficiencies in the market.

Investors are more likely to trade stocks that have caught the market’s attention. The 52-week high price is a widely publicized event, with a recognized importance in driving investor behavior. The 52-week high tends to become an anchor price—meaning the price investors focus on. Generally, this results in stocks trading near their 52-week high being less sensitive to new market information.

At this anchor price, stocks were especially less sensitive to good news that would otherwise further increase the stock price compared to bad news. Investors tend to believe a stock has reached a relative price ceiling near the 52-week high. The anchoring effect overlaps with the expectational error effect, wherein investors wrongly presume future price movement.

The significant increase in liquidity on the sell side of the bid-ask spread near the 52-week high indicates the disposition effect, better known as the tendency for investors to sell winning stocks and hold losing stocks. Nominally, the 52-week high indicates a price that triggers investors to seek gains by selling stocks near the 52-week high price. The significant lopsidedness in the trading book is an indication of investors’ major preference to sell rather than buy stocks trading near their 52-week high.

The 52-week high is an important nominal price event for investors, especially individual investors, who tend to make more under-informed trading decisions than their institutional counterparts. Under-informed individual investors are particularly affected by behavioral biases in their investment decision-making.

Source: “Liquidity and Price Impact at the 52 Week High,” by Joshua Della Vedova, Andrew Grant and Joakim Westerholm; SSRN, September 2021.