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Market Statistics

Short-Term Bears Are Expendable

Although mean-reversion in daily stock market returns has waned significantly since reaching extreme levels late last year, it’s still high enough to cause losses to short-term bears. The market doesn’t like bears.

Last week I wrote that mean-reversion in daily stock market returns is waning. This may be problematic for bulls if this trend continues. Here is an updated chart:

The percentage of down days followed by up days in a 252-day rolling period remains high at 60.7%, as of close of September 22, 2021. I wrote in the quoted article:

By December 9, 2020, the percentage of down days followed by up days in a rolling 252-day window surged to an all-time high of 72.1%. Never before in the history of the stock market since at least 1941 down days have been followed by up days at such a high frequency. This was the result of relentless buying of the dips by traders and investors.

There is a clear downtrend in daily mean-reversion but the effect it’s still significant. Under this dynamic short-term bears are expendable. Profiting from falling stock prices requires good timing, longer-term commitment and solid risk and money management. Buying puts, selling calls or futures, shorting ETFs or even individual stocks, all for short-term gains, is a negative expectation game that benefits strong bull hands.

In addition, largest daily returns in the history of the market have occurred along bear markets, a.k.a. short covering rallies.

In the above chart, uptrend means price above the 200-day moving average and downtrend means price below the same average. It may be seen that 21 out of 22 daily returns larger than 5% have occurred along downtrends and 49 out of 54 daily returns greater larger than 4% have also occurred along downtrends.

Therefore, according to market statistics, short-term bears are involved in a game of highly negative expectation. In fact, playing casino games offers much higher expectation. The market doesn’t like bears and that’s a fact.

Disclaimer:  No part of the analysis in this blog constitutes a trade recommendation. Read the full disclaimer here.

Charting and backtesting program: Amibroker. Data provider: Norgate Data

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