Our weekly mean-reversion strategy for Dow 30 stocks is based on a formula from probability theory that models price action dynamics. Year-to-date the strategy is gaining 13.9% versus 10.4% for S&P 500 total return.
The strategy trades long-only Dow 30 stocks in the weekly timeframe with equal allocation. A maximum of 20 open positions are held at any given time. Positions are entered and exited at the open of the first day of the week. The strategy has a mechanism that avoids bear markets. Based on backtests, the strategy had only three down years since 2000 and worst return was -2.4% in 2008. Maximum drawdown was -12.9% in 2011.
We are optimistic about the future performance of this strategy because it is not based on data-mining but on a sound hypothesis about price action dynamics and this is one reason it is included in our weekly Premium Signals report. Below is the equity curve based on a backtest from 01/03/2000 to 09/28/2018:
Performance is compared to SPY total return buy and hold below:
|Parameter||Strategy||Buy and Hold|
The improvement in MAR (CAGR/Maximum drawdown) is substantial. Win rate is also attractive at 67.5% and this reduces risk of uncle point. The sample is large and includes about 4500 trades.
Below is a table of monthly returns:
There were only three down years since 2000 with maximum loos of 2.4% in 2008.
A Monte Carlo simulation based on equity curve changes indicates less than 5% probability of a drawdown greater than 24%.
Since its inclusion in our Premium Signals report in mid June of this year, the strategy is up 7.5%. For more details click here.
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Charting and backtesting program: Amibroker