Last Updated on July 22, 2021 by Oddmund Groette
Mean reversion has worked pretty well for the main stock indices for some decades. Today we look at a mean reversion trading strategy that goes long at the close when the S&P 500 falls more than twice the average change.
The 2x Fall trading strategy in the S&P 500
Here is the strategy in plain English:
- Calculate the absolute value of the % change from today’s close from yesterday’s close (c2c).
- Calculate a 25 day average of number 1.
- When SPY falls more than two times the number in number 2 from Close to Close (c2c), then go long at the close.
- Exit on next day close.
A very simple strategy. The idea is simply to buy when the risk premium rises. The test period is from 2005 until the present (if today is Monday, the result is showing the gain from Monday’s close until Tuesday’s close):
Let’s see this strategy broken down into weekdays:
As you can see it works pretty well except Thursdays. I can’t think of any specific reasons why except that SPY tend to revert mid-week.
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