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S&P 500 Stocks Mean-Reversion with PSI5 Strategy

The trading strategy is based on the PSI5 mean-reversion algo and  trades S&P 500 stock in daily timeframe. The strategy has outperformed SPY buy and hold total return since 2000.

For the backtests in this article we used Norgate data for S&P 500 index that include current and past constituents to remove survivorship bias. We highly recommend this data service to those who would like to  remove survivoship bias from backtests (we do not have a referral arrangement with the company.)

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The strategy is based on our mean-reversion PSI5 algo. This algo is not data-mined but based on a formula from a text in probability theory and is available for sale to professional traders and hedge funds after signing  a non-disclosure agreement.

Backtest details

Time-frame: Daily (adjusted data)
Strategy type: Long-only
Market: S&P 500 constituents, past and current
Backtest period: 01/03/2000 – 12/17/2019
Commission per share: $0, $0.005 or $0.01
Maximum open positions: 250
Position size: Equity/250
Position entry and exit: Open of next bar

Below is the equity curve of the backtest (no commissions)

Strategy performance with various levels of commission

$0.00 $0.005 $0.01 Buy and Hold
CAGR 10.7% 7.7% 6% 6%
Max. DD -27.5% -32% -34% -55.2%
Sharpe 0.70 0.51 0.40 0.32
Win rate 63.8% 63.2% 62.7%  100%
Trades 262,675 253,369 245,485  1

The strategy has outperformed or matched SPY total return buy and hold on both absolute and risk-adjusted basis depending on commission level.

The strategy finished 2008 bear market in the black despite high equity volatility. This may be repeated in the future but there are risks of failure if bear market dynamics change. However, since the strategy is based on a fundamental model fo price action behavior, we are optimistic it will continue performing well although there are no guarantees.

The strategy has around 250K trades since 2000 and there is no survivorship bias because we used the stocks that were part of the index at the time of the signals. Most backtests in financial blogosphere have few trades only and do not deal with the bias.

Obviously, the performance of strategies with very large number of trades in the order a hundreds of thousands is sensitive to trading friction (commission and slippage.) These strategies are suitable only for professional traders and funds that have access to sophisticated liquidity search algos at low trading cost.

This strategy can be implemented with PSI5 mean-reversion algo.

Charting and backtesting program: Amibroker

Data provider: Norgate Data

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