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Ammeo

Mean Reversion

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Its a simple thing meaning prices and returns eventually move back towards the mean or average value over a historical period of time...we are now Gold and Apple coming to what we could call a mean reversion cause if we average the prices of their 5-10 years time then they stand around their mean or somewhat above or below.

 

However, Inflation plays a different role in calculation "Mean Reversion" as inflation adjustment will most probably move the average higher than what really seems which could mean Gold or Apple could be slightly undervalued.

 

So my question will be is it now a good time to buy any of Gold or Apple or any other asset out of its Mean Reversion? i am personally still bearish on both but think both could provide a good buying opportunity in near future...

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First, you have to be careful how you define "mean".

 

Second, you have to be careful what you're applying that definition to.

 

Gold is a commodity. Apple is a stock. Then of course there are indices. And futures.

 

Gold as a commodity is worth whatever people are willing to pay for it. Whatever it was a year ago or five years ago or ten years ago isn't particularly relevant, particularly since gold has little intrinsic value beyond its industrial use.

 

Apple is a stock, and its intrinsic value is its book value, which is considerably less than its price at present.

 

Then there are the indices, which are an amalgamation of all the stocks and so forth of which they are comprised.

 

Therefore, you are probably better off looking to the past, where a great many people were interested in and willing to purchase as they may be interested in and willing to purchase at the same price again. With regard to gold we are in one of those ranges now. Whether people will eagerly buy here or eagerly unload what they have remains to be seen. Anticipate both outcomes.

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I

However, Inflation plays a different role in calculation "Mean Reversion" as inflation adjustment will most probably move the average higher than what really seems which could mean Gold or Apple could be slightly undervalued.

 

So my question will be is it now a good time to buy any of Gold or Apple or any other asset out of its Mean Reversion? i am personally still bearish on both but think both could provide a good buying opportunity in near future...

 

Ask yourself is gold really going to adjust and revert to an inflation adjusted mean....then ask has it done so in the past. (InflationData: Is gold really a hedge?) When a sales man tells you gold is a great inflation hedge, then they tell you in the next breath that gold should be at $5000 oz because of this, ask them so why has it been such a bad inflation hedge over that time if it is meant to be a great one.

 

Is this a good measure to even define your mean? What time frame are you talking about?

Are you using real gold prices to adjust for inflation (adjust furtures prices its different again)....which countries inflation, in USD....if you adjust for people in different countries the results vary.

 

and as DBP says comparing Apple and gold - crazy.

 

It appears you might be looking for a justification for a trade.

 

It does raise an interesting question as well regards support and demand - when people adjust prices areas of support and resistance change.....people dont think and react like this in real life - they think oh i bought it at $400. They dont take into consideration that it was many years ago.....just food for thought.

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Re my post above, a chart of the S&P may help illustrate this notion of "mean".

 

To a large extent the S&P has been in a trading range since '97. If you take the middle of this range, you get the mean (the pink line). If you go by trading volume, i.e., where the most trading has taken place, you end up a little higher (the blue line, +/-). Whichever, the index will revert to this mean. And has for 16 years.

 

When most people talk about mean reversion, however, they do so within the context of the "uptrends" and "downtrends" within this trading range. If you were to draw trend channels to track these up and down swings (not done here to keep things simple), you would be able to draw a line through the centers of these channels. These would be the means for each of these channels, which are essentially diagonal trading ranges (this accounts for the commonly-held and incorrect notion that trendlines provide support and resistance).

 

With gold, you would/could have seen this dynamic beginning at the end of 2011, and gold bounced back and forth through the mean of this range for 19 months (though it would have taken a month to establish the mean to begin with). Now, however, gold has dropped out of this range and is seeking "value". Good luck with that.

 

Apple traded in a series of ranges until the end of 2011 (though if one used a small-enough interval, he could find many ranges on the way up and the way back down). But that's old news. Now, like gold, Apple traders/investors are seeking value. In this case, though, Apple, like most stocks, has an intrinsic value. Whether or not investors are willing to pay a premium over that remains to be seen.

 

In both gold and Apple, therefore, "mean reversion" is no longer particularly appropriate unless one tortures a trendline into fitting whatever the chartist has in his mind. The market, though, doesn't care what the chartist has in his mind. It's interested only in where transactions have taken and are taking place. And in the case of Apple, the last of these "congestions" spanned July through Dec '11, which is where we sit now.

Image8.thumb.png.233c7cd3df094e02ddbf6d648c755b76.png

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Ask yourself is gold really going to adjust and revert to an inflation adjusted mean....then ask has it done so in the past. (InflationData: Is gold really a hedge?) When a sales man tells you gold is a great inflation hedge, then they tell you in the next breath that gold should be at $5000 oz because of this, ask them so why has it been such a bad inflation hedge over that time if it is meant to be a great one.

 

Is this a good measure to even define your mean? What time frame are you talking about?

Are you using real gold prices to adjust for inflation (adjust furtures prices its different again)....which countries inflation, in USD....if you adjust for people in different countries the results vary.

 

and as DBP says comparing Apple and gold - crazy.

 

It appears you might be looking for a justification for a trade.

 

It does raise an interesting question as well regards support and demand - when people adjust prices areas of support and resistance change.....people dont think and react like this in real life - they think oh i bought it at $400. They dont take into consideration that it was many years ago.....just food for thought.

 

I am not looking for a justification for a trade...and im not comparing Gold with Apple either or to any indices or futures whatsoever.....i just simply asked on opinions on how the mean reversion phenomenon can currently be applied to both the assets with adjustment to inflation, i know am not the guru here and nor will be, even many big hedge fund managers dont call themselves the guru cause in the end its the market that always wins ...

 

Btw thanks for the link,i'll read it out..:)

Edited by Ammeo

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So my question will be is it now a good time to buy any of Gold or Apple or any other asset out of its Mean Reversion? i am personally still bearish on both but think both could provide a good buying opportunity in near future...

 

I believe its time to buy gold. But I am not sure about Apple.

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I believe its time to buy gold. But I am not sure about Apple.

 

It is always a sense to buy gold in long term run because it will grow in price whenever economic scenario gonna take its way. But my broker Hotforex offers only CFD on gold no futures, but i thing it is enough to speculate and get good 20-30 pips everyday

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mean reversion is a theory suggesting that prices and returns eventually move back towards 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.

 

This theory has led to many investing strategies involving the purchase or sale of stocks or other securities whose recent performance has 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. Percent returns and prices are not the only measures seen as mean reverting; interest rates or even the price-earnings ratio of a company can be subject to this phenomenon.

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mean reversion is a theory suggesting that prices and returns eventually move back towards 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.

 

This theory has led to many investing strategies involving the purchase or sale of stocks or other securities whose recent performance has 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. Percent returns and prices are not the only measures seen as mean reverting; interest rates or even the price-earnings ratio of a company can be subject to this phenomenon.

 

Maybe because investing in an asset overheats it's and sometimes it needs to cool down to launch the process again. I stick to the opinion that the higher is upsurge the deeper is collapse when it happens. What do you think?

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