engleski

Price distance to moving averages and subsequent returns

This paper is testing the premise that U.S. stocks exhibit mean reversion characteristics in the short to medium term (one week to one year), with the “mean”being the most commonly used moving averages. The analysis indicates that there is a connection between the distance of stock prices to moving averages and subsequent returns: portfolios of stocks with lower prices to moving averages generally outperformed portfolios of stocks with higher prices to moving averages This “overextended” effect is more pronounced when using shorter moving averages of 20 and 50 days, and is especially strong in short-term holding periods like one and two weeks. The highest annual returns are recorded when buying in the range of 0-5% below shorter moving averages of 20/50 days, and 0-10% below longer moving averages of 100/200 days. However, buying very far below almost all moving averages on almost all holding periods produces the lowest returns.

Moving averages ; mean reversion ; U.S. stock market ; technical analysis ; P/MA ratio ; R-squared

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