Adam, you say stocks are more prone to mean reversal and we know commodities tend to trend. But what about equity index futures like the ES? Are they more likely to reverse to the mean like their underlying? And does the 2 modes also depend on the timeframe you watch?
Thanks for a reply,
Markus
Hi Markus. Thanks for a great question. In general (and I have to stress the “in general” part), stocks tend toward mean reversion, commodities tend to be cyclical (again, depending on the commodity), and currencies tend to trend. Those are gross overgeneralizations. Though they can be verified quantitatively, it always makes sense to be very careful of glib categorizations like that.
Equity indexes are more prone to mean reversion than individual stocks, probably because they smooth out so many company-specific events in the larger portfolio. Futures contracts act like whatever the underlying is. (I don’t think this was your question, but it bears mentioning.) Stock futures act like stocks, currencies futures act like currencies, etc.
As for timeframe, the answer is yes and no. There are subtle differences on the way these tendencies play out across timeframes. This is why we can’t just automatically take something that works daytrading and apply it to weekly charts with the same results. These tendencies are also obscured and complicated by the noise on shorter timeframes—are you seeing mean reversion or random walk activity? It’s not always easy to tell. The broad tendencies to carry through to timeframes though—currencies tend to be “trendier” than stocks on all timeframes.
Again, I have to qualify this answer with a thousand qualifiers. These are just very high-level observations, and are so far removed from actual trading that you could do yourself and your trading account harm if you tried to apply them simply. (E.g., “let’s just fade this move in this biotech stock because stocks have great mean reversion.” Please don’t.) They are, however, important statistical context for market structure and price action across different asset classes and it’s good to keep these differences in mind as we develop systems and do research.
