2 SPX Stocks that Could Mean-Revert

This data set calls out the shares of WCG and TWTR as potential pullback candidates

Senior Quantitative Analyst
Apr 9, 2019 at 4:15 PM
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Apple (AAPL) looked on the verge of a 10-day winning streak today before falling early afternoon and ultimately closing down on the day. That got me curious about stock winning streaks, but looking only at AAPL leaves a small sample size. I could see these situations either way: Maybe it’s a good momentum play, so go long a stock during a winning streak, or maybe the tendency is mean-reversion, so go short. This week I’m looking at how S&P 500 Index (SPX) stocks have fared after winning streaks.

Stocks After Winning Streaks

For the analysis below, I looked at current S&P 500 stocks going back to 2010. Then I looked at the stock’s next day return based on how many days in a row the stock had been up. Once the streak got past 10 days, I grouped the stocks together as 11+ days.

The average next-day return for a stock based on its winning streak has an unmistakable trend. Stocks down one day (zero-day winning streak) average a 0.08% return the next day. The average daily return trends down from there averaging a loss of 0.06% once you get to 11 or more straight days positive. Based on this, stocks look more likely to mean-revert the longer the winning streak.

average next day 1

This chart shows how often the stock was positive based on the winning streak. Stocks are most likely to be positive after a down day. They’re significantly more likely to be down after 11+ winning days. In between, however, it kind of chops around the 50% level with a big spike, for whatever reason, around eight days (most likely randomness).

stocks percentage positive 2

Here’s another way I looked at it. Below shows how often a stock, based on its winning streak, beat the median S&P 500 stock on that specific day. There’s that strange pop around eight days again, before falling hard past 10 days.

stocks beat daily median 3

WCG and TWTR the Lone Survivors

After the down day today for AAPL, it leaves only two stocks in the S&P 500 with a winning streak of more than five days. Wellcare Health Plans (WCG) and Twitter (TWTR) have winning streaks of 10 trading days and nine, respectively. Based on the data above, there’s potential for some mean reversion in both names.

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