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Mean Reversion Strategy & Top 25 Stocks by Market Cap (2021)
Explore the differences between mean reversion, breakout, and momentum strategies. Identifies top 25 stocks by market cap at the end of 2021 and creates a mean reversion strategy for them.
Aurora: Hello. Do you need help finding some new stocks for your watchlist? Maybe we can find stocks based on their Revenue or Net Income?
User: What is the difference between mean reversion, break out, and momentum strategies?
Aurora: Here's a quick overview of the differences between mean reversion, breakout, and momentum strategies: **Mean Reversion** - Assumes that prices tend to revert back to their historical average or 'mean' over time. - When a stock price moves significantly away from its average (either too high or too low), the strategy bets it will return to that average. - Example: Buying a stock after a sharp decline, expecting it to bounce back. **Breakout** - Focuses on identifying when a stock price moves outside a well-defined support or resistance level. - The idea is that once the price 'breaks out' of this range, it will continue moving strongly in that direction. - Example: Buying a stock as it moves above a previous high, expecting continued upward momentum. **Momentum** - Assumes that stocks which have performed well recently will continue to perform well in the near future (and vice versa). - It looks for strong trends and aims to ride the trend as long as possible. - Example: Buying stocks that have been rising steadily over the past few months. **Summary:** - **Mean reversion** bets on prices snapping back to average. - **Breakout** bets on prices moving strongly after breaking key lev…
User: - A simple moving average is above a longer simple moving average - A simple moving average is above a price - A simple moving average is below a price - A stock is below a lower bollinger band - A stock is above a lower bollinger band - Relative strength index is below a value (30) - Relative strength index is above a value (30) - A stock’s rate of change increases (and is positive) - A stock’s rate of change decreases (and is negative) These are all different market conditions. Which ones are breakout, which are momentum, and which are mean reverting?
Aurora: Here's a classification of those market conditions into **breakout**, **momentum**, and **mean reversion** strategies: ### Breakout Conditions - **A simple moving average is above a longer simple moving average** *Often signals a breakout from a previous trend (e.g., Golden Cross)* - **A simple moving average is above a price** *Can indicate a breakout if price moves above a key average* - **A simple moving average is below a price** *Can indicate a breakout if price moves below a key average* ### Momentum Conditions - **A simple moving average is above a longer simple moving average** *Also used in momentum to confirm trend direction* - **A stock’s rate of change increases (and is positive)** *Indicates accelerating upward momentum* - **A stock’s rate of change decreases (and is negative)** *Indicates accelerating downward momentum* - **Relative strength index is above a value (30)** *Suggests momentum is recovering from oversold* ### Mean Reversion Conditions - **A stock is below a lower Bollinger Band** *Suggests price is oversold and may revert upward* - **A stock is above a lower Bollinger Band** *Price moving back inside the band, indicating reversion* - **Relative strength…
User: What are the top 25 stocks by market cap as of the end of 2021?
Aurora: Here are the **top 25 largest companies by market capitalization as of the end of 2021**, based on the latest available trading day on or before December 31, 2021: | Ticker | Market Cap (USD) | Date | |---------|-------------------------|------------| | [AAPL](https://nexustrade.io/stock/AAPL) | $2,963,222,636,670 | 2021-12-31 | | [MSFT](https://nexustrade.io/stock/MSFT) | $2,533,019,152,992 | 2021-12-31 | | [GOOG](https://nexustrade.io/stock/GOOG) | $1,926,437,348,800 | 2021-12-31 | | [AMZN](https://nexustrade.io/stock/AMZN) | $1,683,872,000,000 | 2021-12-31 | | [TSLA](https://nexustrade.io/stock/TSLA) | $1,054,666,440,000 | 2021-12-31 | | [META](https://nexustrade.io/stock/META) | $946,488,900,000 | 2021-12-31 | | [NVDA](https://nexustrade.io/stock/NVDA) | $735,250,000,000 | 2021-12-31 | | [TSM](https://nexustrade.io/stock/TSM) | $623,936,814,508 | 2021-12-31 | | [TM](https://nexustrade.io/stock/TM) | $562,881,338,711 | 2021-12-31 | | [UNH](https://nexustrade.io/stock/UNH) | $472,941,186,675 | 2021-12-31 | | [JPM](https://nexustrade.io/stock/JPM) | $471,455,455,000 | 2021-12-31 | | [V](https://nexustrade.io/stock/V) | $463,644,829,324 | 2021-12-31 | | [JNJ](https://nexustrade.io…
User: Using everything from this conversation, create a mean reverting strategy for all of these stocks. Have a filter that the stock is below is average price is looking like it will mean revert. You create the rest of the rules but it must be a rebalancing strategy
Aurora: **Description:** This portfolio implements a **mean reversion** strategy across the **top 25 stocks by market capitalization as of the end of 2021**. The core idea is to identify when a stock's price has fallen below its recent average, suggesting it is oversold and likely to revert upward toward its mean. The strategy filters for stocks whose current price is **below their 20-day simple moving average (SMA)** and where the **14-day Relative Strength Index (RSI) is below 30**, indicating oversold conditions. Once these conditions are met, the portfolio **rebalances equally** into all qualifying stocks, betting on a bounce back toward their average prices. The portfolio is reviewed and rebalanced **every 14 days (bi-weekly)** to capture new mean reversion opportunities and to exit positions that have reverted or no longer meet the criteria. This approach combines price deviation from the average with a momentum exhaustion signal (RSI) to increase the probability of successful mean reversion trades. The initial investment is $10,000, equally allocated among the filtered stocks at each rebalance. The **full list of stocks** considered for filtering and rebalancing includes: AAPL, MSF…
User: Backtest this strategy across Covid