The S&P 500 Reverts Back to the Mean

Posted: Dec 12, 2017 2:13 PM
The S&P 500 Reverts Back to the Mean

Since the end of the first quarter of 2016, the S&P 500 has experienced a relatively stable period of order, where the variation of stock prices with respect to the mean trend curve established from the relationship between stock prices and their trailing year dividends per share has generally followed a standard normal distribution.

When we last reported on the status of the current period of order several months ago, the level of the S&P 500 had dropped to the point where stock prices were within one standard deviation of falling below a level that would indicate that the period of order was at very high risk of breaking down. Today, we can confirm that the S&P 500 has instead reverted back to the mean trend curve that defines its current period of order.

So in case you've ever wondered what "reverting to the mean" really means where stock prices are concerned, what has happened with the S&P 500 from 21 August 2017 to 8 December 2017 can be considered to be a textbook example of mean reversion.

And in case you're wondering what it means when stock prices move outside the outer limits described by this kind of analysis, where order really does break down (as opposed to simply being the result of statistical outliers in a continuing trend), the ultimate textbook example involves the ultimate sell signal.