Most of you are familiar with painting the tape using the direction of the linear regression line-of-best-fit as an indication of trend. That's a good start, this analysis ups the ante a notch by measuring how unusual the standard error of the regression estimate is relative to that line.
Okay, don't get freaked out by the Stats-101 reference! It's simply a measure of how accurately the predicted trend line is fitting the actual price series! In this case, we are referencing that accuracy level relative to historical norms to decide whether we are in fact in more of a mean-reverting versus a trending environment. Think of it as a "third state".
The color key below employs a smoothed monthly look back period with up-trends in green, down-trends in red, and mean-reversion oriented periods in purple. I expect that this concept could be advanced significantly with further study, but here is a first pass graphical look at the idea going back ten years using the S&P 500 (SPY) as inspiration:
Jeff Pietsch is a registered investment adviser in the State of Washington. The adviser may not transact business in states where it is not appropriately registered, excluded or exempted from registration. Individualized responses to persons that involve either the effecting of transaction in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption.
This blog is for educational purposes only, and nothing herein should be construed as an offer to buy or sell, or as a solicitation of an offer to buy or sell securities, or to provide individual investment advice. Investing is risky and past performance, whether actual or tested, is no guarantee of future results. The author neither endorses nor warrants the content of this site, any embedded advertisement, or any linked resource. The author or his managed funds may hold either long or short positions in the referenced securities. Republication rights must be expressly granted by author in writing. Astrices (*) indicate a compensated hyperlink or product reference. Author is the sole owner of the "ETF Rewind," shares in the proceeds of "DV_indicators", and may exchange services in-kind with participant contributors.