Category Archives for "Stocks"
My article on “Is mean-reversion dead?” produced lots of suggestions from readers on other tests to try. We will jump right in and look at what these research suggestions produced.
In the previous post “Which S&P500 stocks to focus on when the SPX has 5 higher closes,” we discovered which stocks (from the S&P 500) produced the best returns when the market closed higher five consecutive days . The results from that work, as often happens, suggested a deeper look; specifically, can those concepts be applied to S&P 500 stocks without having to wait for specific market conditions (e.g. five up days in the SPX)? If so, maybe this is the start of a viable, standalone trading strategy. As indicated, this post builds on the previous post, so please refer as needed.
Rob Hanna had a good post recently; titled What the String of 5 Higher Closes Under These Circumstances is Suggesting . With mean reversion trading, you are expecting stock prices to snap back towards their mean, like a rubber band stretched too far. But, sometimes, that rubber band can be stretched so far that it breaks (and therefore, won’t snapback). For some time, I have been searching for how to tell when that rubber band is stretched so far that it is broken. Rob’s post had several key concepts that might help us to solve this puzzle and possibly even be the foundation of a stock strategy.
My great friend and expert trader Steven Gabriel often pushes me to answer this question; and prove it. We, perhaps too fondly, remember the great mean reversion trading years of 2005, 2006, 2008, 2009, 2010. We discussed this topic often in 2011 and 2012. Steven Gabriel would often call me on days when in the past, we would both be making 5+% on a day that our stocks would be mean reverting, but now we would be making a mere 1%.
My theory is that mean reversion is in hibernation waiting to come back; or said another way, mean reversion is simply mean reverting. I think that when too many people trade mean reversion, the space gets crowded and we see fewer winning trades and smaller returns. However, this has always been conjecture never backed up with numbers. Are we really seeing fewer trades? Smaller returns? Time to do the research and see what the numbers tell us.