July 21, 2017

Short-Term, High-Probability, Mean-Reversion Strategy

Up, up and away!

Low inflation, low interest rates, accommodative Fed policy, strong earnings and healthy corporate balance sheets have helped to keep the market racing higher. Or maybe it is just the Fed pumping money into the economy through QE2? Either way, the market has been on a historical tear over the past two years.

Absolutely, nothing can hold this market down.

The nuclear incident in northeast Japan remains unresolved. Coalition jets are bombing North Africa, namely Libya. More protests in Yemen, Syria and even Jordan. A grim UK budget prognosis. More Eurozone debt bailouts on the way in Ireland, Portugal, Spain, Italy and Greece. New home sales plunged to a historical low.

Again, it doesn’t matter – the markket continues to surge.

Helicopter Ben has managed to keep the market on a straightt line upward since market bottomed in March 2009, but my guess is that the party will be end soon.

The  bearish signs are piling up.

Over the past week, the VIX has gone from more than 30% above its average to more than 15% below. In the past this type of volatility in volatility has been overwhelmingly bearish. If you just look at 15% both ways there are eight instances when this type of movement has occurred and only once was it bullish for the market one month later

Moreover, the latest bull market has made it to the somewhat elusive two year mark. Only fourteen out of thirty-three bull markets have made it past two years. That isn’t an overwhelming statistic, until you start to compare the average returns of the prior two year bull runs to the current bull market. The average return for previous bull markets was 43.6 percent which is roughly half of the current 86.7 percent return of the current bull market. There have been only two bull markets that have exceeded the return of the current bull market.

In other words, only two out of thirty-three bulls markets have performed better during their two year anniversary than the current bull market. So most would probably conclude from this information that the current bull market is somewhat stretched, but when delving further into the statistics it was quickly noticed that all fourteen made it to a three year anniversary.”

There is no denying that there are still major issues in the economy. Only time will tell if the market can work through all of this mess before the bears wake up, but winter is over spring is here and we should never forget the old saying, “Sell in May and Go Away.”

Have a great night!

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Short-Term High-Probability, Mean-Reversion Indicator – as of close 4/04/11