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One Of the Best Weeks For Mean-reversion

This was one of the best weeks for weekly mean-reversion signals in Dow stocks. Below are details and strategy results.

We include long-only mean-reversion signals for Dow stocks in our Weekly Premium Articles. In last week’s report that was published during the weekend we listed the following stocks that had generated a long signal: CVX, DIS, GE, GS, IBM, UTX. From the open to the close of this week, the average return for these six stocks was 2.3%.

The signals are generated by our unique MR5 algo that is based on a formula from a graduate text on probability and stochastic processes. Daily and weekly mean-reversion based on this algo have performed well so far and have outperformed benchmarks. Below are backtest results for the weekly mean-reversion version for all Dow 30 stocks with 10 maximum open long positions and position size of 10% per stock (equal allocation.) Commission was set to $0.01/share. Click on images to enlarge.

The strategy has outperformed S&P 500 total return ($SPY) since 2010 (01/04/2010 – 01/26/2018) CAGR for the strategy is 18.3% versus 14.4% for SPY buy and gold. In 2011 the strategy return was more than 16% versus a flat year for SPY.

Parameter Weekly mean-reversion SPY B&H
CAGR 18.3% 14.4%
Max. DD -15.5% -18.6%
Sharpe 1.57 0.99
MAR 1.18 0.77
Trades 1777
Win rate 71%
Best year 31.4% – 2010 27.7% – 2013
Worst year 6.2% – 2014 -0.1% – 2015

A very attractive feature of this strategy is the high win rate of about 71%. This contributes to a conservative Monte Carlo result as may be seen in the backtest charts above.

The probability of a drawdown greater than 12% is less than 1%.

For more details about this strategy click here.

Disclaimer:  No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.

All charts were created with Amibroker – advanced charting and technical analysis software.

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