Inspired by Larry Connors’ Cumulative RSI(2) (found in this post), I decided to test out how a Cumulative DV2 indicator would work. This is a frictionless test on SPY from 1/1/2000 – 12/26/2012. I tested the cumulative DV2 using default parameters (Buy/Cover if DV2 < 50 & Sell/Short if DV2 > 50)
Normal DV2:
2-day cumulative DV2
3-day cumulative DV2
4-day cumulative DV2
5-day cumulative DV2
6-day cumulative DV2
7-day cumulative DV2
8-day cumulative DV2
9-day cumulative DV2
10-day cumulative DV2
11-day cumulative DV2
The results make me think of one of David Varadi‘s posts (link) about how mean-reversion isn’t necessarily ‘dead’, it has only changed to become mean-reverting on a longer period of time (per the equity charts of the 4-9 day cumulative DV2). An adaptive framework similar to that found at this post by Sanz Prophet could definitely be used.
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