With the current bear market in full swing, we decided to look into what sort of positives can be taken from these consecutive down days. Here we derive a strategy based on daily returns that outperforms the wider market: Buying stocks on the open, after a worst year-to-date (YTD) daily return, and holding for 10 days.
Here we expose ourselves to two crucial ideas. Firstly, mean reversion tends to occur after a ‘statistically significant’ extension, the worst performance day in a year is likely an overreaction (according to statistical views of the market), especially due to the news-heavy market environment now, and more generally when markets experience shock and prices of equities sell off due to no ‘fundamental’ reason i.e no earnings releases, unrelated news events etc.
Additionally, practitioners of contrarian technical analysis look for sharp movements such as ‘breakouts’ and look to buy at suppressed levels, while some market participants, due to the ‘random’ nature of the move, believe that a retracement to ‘truer’ levels will occur. With markets selling off, a regime like this can be very favourable for accumulating a long-portfolio. We can also generalize our research into any lookback period and any holding time.
Whatever the reason, we wanted to explore what buying a share would look like for a variety of tickers. I will be working with ticker ‘INTC’, and the findings here have not yet been optimized, so I will pick a ‘Lookback Period’ of a year and a ‘Holding Period’ of 10 days, i.e we will begin with yesterday’s change close-to-close as our local minimum and, without digging into the nuances in employing a consistent approach to trade execution, we hold the share for the ‘holding period’ unless we encounter a new ‘local minimum’, in which case we close our current position and re-enter the next day.
Cumulative Returns and Essential Statistics
Presenting a longer timespan for AMZN from 2000-01-01
As you can see, both in market sell-offs and in rallies, the strategy is backed by favorable measurable ratios. You can continue developing by introducing lags to entry, creating a risk management system to control drawdown at any given point, and so on. The scope for improvement is endless, and hopefully this article highlighted the strength of even very basic strategies.