The Anti-Outlier Trade

Most people like talking about a good outlier story: Can you believe bitcoin is up over 1,000% since the start of 2019? Did you see WTI crude oil futures went negative last year? How crazy was that rally in GameStop from below $20 to above $400 in a matter of weeks?

But trading an outlier isn’t as easy. Increased volatility means you could be either really right or really wrong in a flash. Large swings mean a move against you could cause you to tap out before a move in your favor. And few people feel good about buying into an all-time high, or vice versa.

The Case for Mean Reversion

You know what’s not as fun to talk about, but occurs much more often? A market that approaches an outlier but ends up reverting to what’s deemed “normal.” Last week was ripe with mean reversion trades including a bounce back in metals, the convergence between technology and industrial stocks, and a pull back for both US dollars and interest rates.

Last Week’s Forecast via Realized Volatility (Small 10YR Yield S10Y)

Near-outliers aren’t going to make you more interesting at your next dinner party, but they could present you with a simpler, more straightforward opportunity the next time you open your platform.

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Source: https://www.danielstrading.com/2021/04/07/the-anti-outlier-trade