Reversion to the Mean?

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We have witnessed a long, steady grind higher since 2012 began.

It was more of the same this week. The low volume grind shows little conviction, but continues to amaze even the most bullish of market participants.


Because we have only seen a daily pullback of 0.73% since the year began. That’s right, 33 days without a 1% pullback. That is the 13th longest streak since 1928.

The Nasdaq has been the leader among the benchmarks as it has advanced over 13% since the beginning of the year. Of course, with Apple making up roughly 20% of the Nasdaq 100 index, it is no surprise to see such a huge return in such a short period of time.

When the largest company in the world, with a market cap almost $100 billion more than the second largest company in the world Exxon,  gains 25% in barely a month you should expect to see a rise in the indexes.

But the move, by definition, has gone parabolic.

The tech-heavy Nasdaq 100, more specifically Apple (NASDAQ: AAPL), has led the way. But how long can a company with a $500 billion market cap continue to go parabolic. An advance that has sent Apple 35% higher since December 19th.

In my opinion, you have to be crazy to be buying at these levels.

Just look at the chart and tell me which side you would rather be on over the next 30 days.

Remember, this is the largest company in the world. How sustainable is that type of move?

Which leads me to a very interesting statistic that I came across late last week after Apple pushed 2% higher to $525 only to close lower 2%.

Jason Goepfert of stated that there have been 3 other times in 15 years that Apple stock rallied at least +2% to a 52-week high, then reversed during the course of the trading days to close at least -2% lower. Every time, the S&P 500 declined at least -6.8% at some point during the next month. Moreover, if you just took the 1% reversals in Apple, the S&P would have lost on average -5.2%.

Next week brings a shortened week and by historical seasonality standards a bearish one to boot. The day following options expiration is bearish and the week following President’s weekend is also historically bearish.

Is next week the pullback that reverts to mean? We are now several standard deviations above the mean and almost every indicator I follow is bearish. Of course, it has been that way for several weeks now without the slightest pullback.

I think we all know at this point that the risk is to the upside. So stay nimble. Enjoy the ride higher if you are a bull, but be very, very careful when the first bearish confirmation occurs. 

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