Stock Market: Reversion to Mean

Updated: Sep 13, 2019

Stocks generally tend to reverse to the mean. This simply means a spike or drop in stock price is followed by a fall or rise in it, towards the mean. This could in-fact form a powerful source of investment (source). Can this be applied to sky-rocketing rally in the US indices? say for e.g. S&P 500?

$SPX is trading way above 200-D SMA indicator and there are theories that support move of the index further in either direction. Applying theory of reversal to mean to SPX suggests impending normalization in price. This rally that rocketed on belief of better policies for businesses from the new US administration, could likely take a breather realizing that the implementation of these reforms are still some further away. Today's Presidential speech to the Congress will set certain tone to the market as the FED continues to perform the balancing act. Interesting times indeed!