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Showing posts from January, 2018

The "Reversal" Play: A Study of Company Size, Industry, and Sector

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In technical analysis, the “reversal play” is a well-known strategy used by traders to take advantage of imbalances in momentum. The strategy roots itself in the idea of mean-reversion, large decreases in the share price of a stock are typically followed by a period of increases as the value roughly regresses to a mean. From a fundamental point of view, the investor assumes that a sudden spike in share price (which this data looks at) is not accompanied by an immediate fundamental change, therefore, the company has become undervalued.

This phenomenon has been heavily researched before showing that this strategy is capable of producing excess returns. Marc Bremer and Richard Sweeney in “Reversal of Large Stock-Price Decreases” (1991) found that “extremely large negative 10-day rates of return are followed on average by larger-than-expected positive rates of return over following days.” Bremer and Sweeney found that the recoveries they studied were relatively slow and “inconsistent with …

2018 Stock Market Outlook

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It's January again, and that mean's another year of trading opens in 2018 closing out the 52 weeks assigned the 2017 label. A new year brings new investment opportunities and closes out others. Rallies and rotations look to be extended, but traders know anything can happen. In 2016, for example, the stocks welcomed investors into the new year with a 220 point drop in the S&P 500 before rebounding over 400 points to end the year in a rally. The rally continued, and 2017 did not disappoint.


Like a smooth ramp, the top 500 companies in the United States (the S&P 500) grew steadily this year breaking record after record. Only a few red days in April threatened to slow the rally, but those were easily trumped by the green days the followed. The S&P 500 returned 19 percent, the Dow Jones Industrial Average returned 25 percent, the NASDAQ returned 28 percent, and the passive investor once again grinned cheekily. The astonishing bullish sentiment has active investors scram…