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Weekly Mean-Reversion In Dow 30 Stocks Outperforms Benchmark Year-to-Date

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:

Trading strategy equity curve

Equity performance of Weekly Dow 30 stock mean-reversion strategy based on backtest from 01/2000 to 09/2018


Performance is compared to SPY total return buy and hold below:

Parameter Strategy Buy and Hold
CAGR 7.3% 5.7%
Max. DD -12.9% -55.2%
Sharpe 1.15 0.30
MAR 0.81 0.10
Win rate 67.5%
Trades 4477 1
Commission  $0.01/share $0.01/share

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


Market signals from systematic strategies are offered in our premium Market Signals service. Stock signals are offered daily in our Premium Stocks report. For all subscription options click here.

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