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Wednesday, July 15, 2015

From Momentum to Mean Reversion: What the Heck Happened in 2000?

After reading about John Orford's Simplest Mean Reversion Strategy and Simplest Momentum Strategy, I decided to take a look at how the S&P composite would react going back to 1950 (as far back as I could pull daily index returns... note these exclude dividends, thus are not total returns).

The rules are simple
  • Daily Mean Reversion: if the previous day was positive, go short; if the previous day was negative, go long
  • Daily Momentum: if the previous day was negative, go short; if the previous day was positive, go long

Performance Results (excluding any transaction costs / ignoring dividends)
  • From 1950 - 2000 (50 years is a HUGE sample size), daily momentum compounded at a 22% annual rate, while daily mean reversion went straight to 0, losing nearly -20% per year.
  • Since 2000, daily momentum has lost -18% per year, while daily mean reversion has compounded at a 17% clip.


Source: S&P