Short-Term, High-Probability Mean-Reversion Indicator: New Extremes to End 2010

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 |  Includes: DIA, EEM, EFA, EWY, EWZ, FXI, GDX, GLD, IBB, IWM, IYR, OIH, QLD, QQQ, RTH, SDS, SMH, SPY, SSO, TBT, TNA, TZA, USO, VXX, XLB, XLE, XLF, XLI, XLU, XLV, XLY
by: Andrew Crowder

December has been another good month for the High-Probability, Mean-Reversion strategy. So far, the options strategy is up 8.7% for the month after a 3.7% gain in November (including commissions). Furthermore, the Sharpe ratio is an astounding 3.6 which is amazing. Of course, it has only been two months, but I am truly looking forward to see how the ratio looks four or so months from now. Check out the results here.

This seems to be the pattern for the strategy – slow and steady. I only trade extreme overbought/oversold conditions so the signals are few and far between (roughly 1-3 trades per month), so this is not a strategy for those who wish to trade on a daily basis. It is for those of us who are looking to stay in the game and more importantly, to reap the rewards over the long-term.

The market continues to be in somewhat of a creeper trend which has led to several extreme short-term overbought readings in all of the major market benchmarks, plus a few sectors, namely financials (NYSEARCA:XLF) and oil (NYSEARCA:USO).

Short-Term High-Probability, Mean-Reversion Indicator – as of close 12/22/10

Benchmark ETFs

* S&P 500 (NYSEARCA:SPY) – 78.8 (overbought)
* Dow Jones (NYSEARCA:DIA) –76.6 (overbought)
* Russell 2000 (NYSEARCA:IWM) – 74.2 (overbought)

* NASDAQ 100 (QQQQ) – 77.3 (overbought)

Sector ETFs

* Biotech (NASDAQ:IBB) – 87.5 (very overbought)
* Consumer Discretionary (NYSEARCA:XLY) – 73.4 (overbought)
* Health Care (NYSEARCA:XLV) – 65.7 (neutral)
* Financial (XLF) – 84.9 (very overbought)
* Energy (NYSEARCA:XLE) – 78.1 (overbought)
* Gold Miners (NYSEARCA:GDX) – 28.8 (oversold)
* Industrial (NYSEARCA:XLI) – 74.1 (overbought)
* Materials (NYSEARCA:XLB) – 82.0 (very overbought)
* Real Estate (NYSEARCA:IYR) – 64.5 (neutral)
* Retail (NYSEARCA:RTH) – 80.4 (very overbought)
* Semiconductor (NYSEARCA:SMH) – 49.2 (neutral)
* United States Oil Fund (USO) – 80.9 (very overbought)
* Utilities (NYSEARCA:XLU) – 62.2 (neutral)

International ETFs

* Brazil (NYSEARCA:EWZ) – 39.8 (neutral)
* China 25 (NYSEARCA:FXI) – 51.1 (neutral)
* EAFE (NYSEARCA:EFA) – 55.3 (neutral)
* South Korea (NYSEARCA:EWY) – 71.9 (overbought)

Commodity ETFs

* Gold (NYSEARCA:GLD) – 49.2 (neutral)

Ultra Extremes

* Small Cap Bear 3x (NYSEARCA:TZA) – 12.0 (very oversold)
* Small-Cap Bull 3x (NYSEARCA:TNA) – 86.9 (very overbought)
* UltraLong QQQQ (NYSEARCA:QLD) – 82.2 (very overbought)
* Ultra Long S&P 500 (NYSEARCA:SSO) – 88.7 (very overbought)
* Ultra Short S&P 500 (NYSEARCA:SDS) – 11.8 (very oversold)
* UltraShort 20+ Treasury (NYSEARCA:TBT) – 49.1 (neutral)

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in QQQQ, USO, XLF over the next 72 hours.