21/1/2022. On 10th January 2019, I posted an article “S&P500 Ready For Huge Rebound Says Linear Regression Chart”. That day, the S&P500 closed at 2596.
By 27th December, the index was closing at 3240; 25% higher.
Then I posted an article “S&P500 Due For Correction, Says Linear Regression Chart”.
Less than three months later, on 23rd March 2020, the index closed at 2237; 30% lower.
No magical predictive powers here – we all know that markets go up and down. The concept of mean reversion says that if data points are at the edges of the long-term trend, then odds are stronger they will veer back towards the mean, and weaker they will continue to outlie. (Boundaries are 2 standard deviations in the chart below.) The trend itself has to still be in play, of course.
Note this doesn’t mean that the COVID pandemic could have been be forecast – just that there was a much greater risk to the downside than the upside. Good things don’t last forever. (The first linked article explains the technical side of this principle in more depth.)
Let's look at the same chart today.