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« Weighing the Week Ahead: Is the Correction Over? | Main | Weighing the Week Ahead: Does weakness in housing threaten the economy and stocks? »

February 19, 2014


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San Fran Sam

Regarding mean reversion...

the reversion to the related to profits that i have read is profits as a share of GDP.

Second, your hidden pair trade misses another possible outcome... lower revenues and lower profits.


It looks like you are specifically disagreeing with using P/E as a trading indicator.

Mean reversion and trend following are in fact very powerful trading tools, when used properly. However, you have to get a lot of other variables right too.

For example, (the most basic kinds of) trend following did a fantastic job from 2000-2010 for the stock market. Most (longer term) mean reversion (re-balancing) strategies are correlated with trend following strategies.

As I also hinted above, timing matters. It may take a VERY long time for something to mean-revert, but many things do. You still have to figure out how to make returns/keep your capital in the mean time.

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