This was published Wednesday 16 June 2009 on TraderFeed by Brett Steenbarger. Mean reversion works.
Tuesday made it two days down in a row, as the S&P 500 Index (SPY) registered yet another 10-day low.
Since 1989, there have been 478 occasions in which we’ve had two days down in a row, culminating in a 10-day low. There is a bullish bias from one to five days out: a tendency to bounce following weakness. For example, the next day in SPY averages a gain of .20% (293 up, 185 down) vs. a gain of .01% for the remainder of the sample (2399 up, 2275 down). Five days out, SPY averages a gain of .62% (295 up, 183 down) vs. an average gain for the rest of the sample of .10% (2567 up, 2107 down).
It’s easy to get bearish after breaking out of a multiday range to the downside. Historical investigations are helpful checks on our biases, encouraging us to examine all possibilities, rather than get locked into easy assumptions.
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