It is perhaps surprising to learn that most of the market's gains come from a small number of stocks. In fact, this can be a good thing because it allows traders to simplify by focusing on the best performing stocks and ignoring the rest. The all-time high list is one way to find these stocks since it is axiomatic that big winners will spend many weeks on the all-time high list - in some cases these stocks hit new all-time highs hundreds or even thousands of times during their bull run.
Nicolas Darvas and Braden Glett have both written books about making money trading all-time highs. The essence of these strategies was summed up in a comment on the blog: "A list of all time high stocks is very important but hard to come by. If you put a buy on the breakout then a sell stop below the previous resistance your gains can be very big and losses small. Make sure you raise your stop loss with the gains below each new level of resistance."
I would add that successful strategies boil down to a systematic way of controlling risk - through trailing stops for instance - while capturing the high potential for gains. This creates a situation where gains are larger than losses and the distribution of outcomes is positively skewed.
This approach could be applied to any stocks but all-time highs are unique for several reasons:
- People have a cognitive bias that makes them hesitant to push a stock past its 52-week or all-time high price even when the company's fundamentals would warrant it (Why All-Time High Stocks Beat The Market).
- These stocks are in uptrends by any definition.
- All-time highs have no overhead resistance, which means everyone owning the stock is showing a profit and the stocks are more likely to accumulate gains (Olivier Tischendorf has a nice piece on resistance).
- Research has shown that most of the collective return in the US stock market is attributable to a small minority of stocks that spend a disproportionate amount of time making multi-year highs (Long-Term Trendfollowing All-Time Highs and On Average, Individual Stocks Lose Money).
