Regression Line for Major Stock Market Indexes
Mean Reversion :
Would like to reiterate here that the " regression line " is just a "statistical phenomena " same as other indicators in Technical Analysis where we are just using past price trend or movement to manipulate or so call " forecasting " the future price movement.
Whereas "mean reverting " is just a situation that showing market move in "cycles " and tends to revert to mean if there is any "over-shooting " in both directions ( where everyone is either too optimistic or pessimistic ).
Concept Explained: by Investopedia
What is the 'Mean Reversion'
Mean reversion is the theory suggesting that prices and returns eventually move back toward the mean or average. This mean or average can be the historical average of the price or return, or another relevant average such as the growth in the economy or the average return of an industry.
BREAKING DOWN 'Mean Reversion'
This theory has led to many investing strategies involving the purchase or sale of stocks or other securities whose recent performances have greatly differed from their historical averages. However, a change in returns could be a sign that the company no longer has the same prospects it once did, in which case it is less likely that mean reversion will occur.
Per cent returns and prices are not the only measures considered mean reverting; interest rates or even the price-earnings ratio of a company can be subject to this phenomenon.
A reversion involves the return of any condition back to a previous state. In cases of mean reversion, the thought is that any price that strays far from the long-term norm will again return, reverting to its understood state. The theory is focused on the reversion of only relatively extreme changes, as normal growth or other fluctuations are an expected part of the paradigm.
The mean reversion theory is used as part of a statistical analysis of the market conditions, and can be part of an overall trading strategy. It applies well to the ideas of buying low and selling high, by hoping to identify abnormal activity that will, theoretically, revert back to a normal pattern.
The return to a normal pattern is not guaranteed, as an unexpectedly high or low could be an indication of a shift in the norm. Such events could include, but are not limited to, new product releases or developments on the positive side, or recalls and lawsuits on the negative side.
Even with extreme events, it is possible security will experience a mean reversion. As with most market activity, there are few guarantees on how particular events will or will not affect the overall appeal of particular securities.
Mean Reversion Trading
Mean reversion trading looks to capitalize on extreme changes within the pricing of a particular security, based on the assumption that it will revert to its previous state. This theory can be applied to both buying and selling, as it allows a trader to profit on unexpected upswings and save at the occurrence of an abnormal low.
As above mentioned, stocks price for some companies will not revert to mean if these companies are having "fundamental problem ". Basically, I use this chart for a much longer and broader perspective on "portfolio's asset allocation " rather than an individual stock analysis which is much more complicated and required one to look at company's fundamental and macro analysis.
Alternatively, we may also use the market fundamental ratio e.g PE / PB level as compared to their long term mean value as a guide of market valuation.
Regression Line for Major Stock Market Indexes
Here you go .....
Although the STI is still moving below “regression line “, but one needs to bear in mind and take note that the world stock market is such a complicated and intricated, anything happens in other parts of the world will definitely affect the price move of STI.
Remember the W.W.W ( Watch List, War Chest, Wait patiently )
Below link to a pdf file that written by Mark Yusko (Former head of the endowment at the University of North Carolina) has great detail on investment strategies and philosophy from one of the renowned value investor – Seth Klarman :
( you may just read till page 32 on value investing )
These are some of the quotes from the paper :
- There’s no such thing as a value company. Price is all that matters. At some price, an asset is a buy, at another, it’s a hold and at another, it’s a sell.
- Jesse Livermore famously quipped that “I made all my money from my sitting” and Klarman would agree to say, “There's something validating about the message that it's okay to do nothing and wait for opportunities to present themselves or to pay off.” Thus, Patience is not only a virtue, but the cornerstone of a Value culture and the bedrock of the Value structure.
- “In reality, no one knows what the market will do. Trying to predict it is a waste of time, and investing based upon that prediction is a speculative undertaking.” We have seen time and time again the market confounds the pundits and predictors. It will rally when everyone is convinced it will fall, and it will crash when everyone believes the good times will never end. John Maynard Keynes famously commented, “The market can stay irrational longer than you can stay solvent.” We know the perils of trying to take a position that is dependent on short-term market moves.
- There are only a few things investors can do to counteract risk: diversify adequately, hedge when appropriate and invest with the margin of safety.
- It is precise because we do not, and cannot, know all the risks of an investment that we strive to invest at a discount. The bargain element helps to provide a cushion for when things go wrong.
- A margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck or extreme volatility in a complex, unpredictable and rapidly changing the world.
- While some might mistakenly consider value investing a mechanical tool for identifying bargains, it is actually a comprehensive investment philosophy that emphasizes the need to perform in-depth fundamental analysis, pursue long-term investment results, limit risk, and resist crowd psychology.
- “The stock market is the story of cycles and of the human behaviour that is responsible for overreactions in both directions. I think markets will never be efficient because of human nature.”
Quote Of The Day :
“Investing is the intersection of economics and psychology. The analysis is actually the easy part. The economics, the valuation of the business isn't that hard. The psychology, how much do you buy, do you buy it at this price, do you wait for a lower price, what do you do when it looks like the world might end, those things are harder. Those you learn from experience and by having the right psychological makeup.” by Seth Klarman
Extremely good advice.
Patience is in play here, hope it will pay off someday.
Thanks for the comments,,, yah ! Indeed, patience is very important,,,like what Warren Buffett said " The stock market is a device for transferring wealth /money from impatient to the patient."
Hi STE, may I know where you get the historical data for the indices?ReplyDelete
From Yahoo Finance , historical data, select monthly and download to excel,,,
Hope this assist,
Thank you very much for this great post.ReplyDelete
stocks to buy
Hi STE, just started reading your blog recently. Thanks for sharing. You mentioned that you plotted your trendlines manually. I found that excel functions TREND (for trendline) & LOGEST (for +/1SD, +/-2SD) seem to give the data-points for plotting. Hope it helps :)ReplyDelete
Thanks for sharing the valuable info... I will have a look on those formulas,,, :-)
Just wondering if you've found the above functions helpful :)
Thanks for reminding , yah, I did give it a try but still have some question on it and now still using my old methods to plot the chart.
I would appreciate if you could guide me through via my sample file .
If is ok , pls kindly provide me your contact/email through this email : email@example.com
Thanks and much appreciate your assisst.
Thanks for the assist in helping me to automate some of the drawing part of the SD line, is really helpful and would save me lot of time... :-)
Much appreciated !!
would u be willing to share how to create the regression chart for STI? thanks!ReplyDelete
I downloaded the data from yahoo finance and plot the chart. If you don't mind, pls give me your email so that I could forward the sample file to you .. you may just need to insert the new row for new data ... or just paste the whole data set for new market index or even stocks.
Hv sent you the sample file with some explanation, hope this assist and clarify.
Cheers !! :-)
if you do not mind, could you share the regression file with me please? My email is firstname.lastname@example.org
Hi STE, would u also share me on how to create the regression chart for STI? Thanks a lot.Delete
Wel noted your , Will forward you the file seperately . .
Have forwarded the file to you with some detail explanation.
Hope this assist and clarify.
Would you also sharing me on how to create the regression chart for STI? Thanks in advance.
Hi. . Noted yours, could you pls give me your Email id so that I could forward you the file separately.Delete
Have forwarded the file to you separately , hope you may find it useful .
Hi STE, I am also curious about generating the chart. Could you also share the file with me? My email is email@example.com. Thanks in advance!Delete
Have forwarded the file to you , hope is in orderand pls feel free to ask if you have any further inquiry.
Hi Mr Lin XX , per separate message and my e-mail , kindly take note that I have forwarded the file to you. Hope is in order.ReplyDelete
Hi mXXXXlim, per your request and my mail replied , kindly take note that I have forwarded the file to you. Hope is in order and you find it useful.ReplyDelete
Just forwarded the file on how to plot the regression line to you separately.
Hope this in order and useful.
Cheers !! STE
Hi STE, would u also kindly share me on how to create the regression chart for STI? Thank you very muchReplyDelete
Hi Thomas ,Delete
Please kindly let me have your e-mail address , I will forward the sample file with some explanation to you.. my email : firstname.lastname@example.org
Thanks for this informative post.. Can you pls share a sample sheet for drawing regression line ? I have tried using Excel functions like trendline, but doubting if my steps are correct.
Hi STE, do you mind sharing how to create the regression chart for STI? Thanks in advance!ReplyDelete
Could you please just send me a email , I will forward the file with some explanation on how to plot the chart.
My email as below:
Hi Connie/Weichee/ Laurence,ReplyDelete
Per our email exchanged, hope u guys be able to use the file and plot the chart by your own...
Happy investing ...
Cheers !! :D