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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

Disclaimer

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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