But in specific, recurring situations, reversion to the mean is the key to identifying market behavior.
If reversion to the mean means anything, the next 10 years should be good for stocks.
As far as bearish sentiment rising, it may simply represent a reversion to the mean.
Over the long term, however, reversion to the mean tends to reduce even that slim advantage.
There is a reversion to the mean return, but it requires a long enough investment period to revert.
We never know when that reversion to the mean will come to the various sectors of the stock market.
Gradual reversion to the mean seems to be carrying the day: in wealth, jobs and housing as well as share prices.
The rebound in pessimism was a reversion to the mean for bearish sentiment, which signals that worries about the economy have not faded.
So we may be getting to the stage when reversion to the mean starts working against Treasuries and in favour of equities and corporate debt.
The edges lie elsewhere, and based upon what the statistics show over and over again, it's in a reversion to the mean in short-term stock prices.
If markets were truly efficient, price-earnings ratios should be lower than average at the top of the cycle, since investors should anticipate a reversion to the mean.
Though this does somewhat reflect a reversion to the mean, it also shows that some investors are becoming less enthusiastic about the short-term direction of the stock market.
Reversion to the mean can be interpreted many different ways.
Difficult though it is to be guided by reversion to the mean, there is something that sticks in the craw about devoting so much of a portfolio to the best-performing asset in recent history.
ECONOMIST: Property��s strong run is not represented in portfolios
This is due to a combination of factors, including concerns that the market may have gotten ahead of itself on a short-term basis, the increasing possibility of sequestration occurring and a reversion to the mean.
FORBES: AAII Sentiment Survey: Bears Come Out Of Hibernation
The current poor performance of stockmarkets reflects, of course, a reversion to the mean after the excesses seen during the dotcom bubble, when the rolling 25-year annual return of US equities reached a remarkable 16%.
From the perspective of mean reversion, fat tails help to create some of the best opportunities.
From a technical standpoint, there is the potential for mean reversion, or the return of the VIX to historical levels.
FORBES: U.S. Stock Futures Higher After Fed; Netflix Upgraded to Buy at Citi
It is also worth noting that in order for mean-reversion-based strategies to work, it is not required that the mean be realized for long periods of time, but that markets continue to behave as they always have, swinging pendulum like between the depths of despair and irrational exuberance , or, from risk-on to risk-off.
Mean reversion would indicate that the VIX should eventually return to levels close to its prior trading range.
FORBES: U.S. Stock Futures Higher After Fed; Netflix Upgraded to Buy at Citi
Since Apple has not participated in the strong market rally, based on the mean reversion theory, a strong case can be made to buy Apple here.
FORBES: Disappointing Sales At Foxconn Fail To Bruise Apple Stock For Now
Philosophers and mathematicians can debate what causes mean reversion, but in the case of the markets, it seems to be a "wisdom of crowds" phenomenon--the historic return represents the prices investors put on future corporate earnings, which tend to climb in the long run.
This lag sets the stage for a possible strong rally in gold equities relative to bullion once mean reversion to historical levels kicks in, just like it has done time and time again.
FORBES: Gold Stocks Look Like Diamonds In The Rough With Metal Making New Highs, Stocks Slumping
应用推荐