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Nice little article.

I think he's wrong about this family of strategies lacking mean reversion, though.
There are subtly different types of mean reversion one could talk about.

He seems to be making the tacit assumption that market movements are random walks: zero serial autorrelation.
Relatively few adherents of trend following start with that as an axiom.

If one posits that market trends do exist at some range of temporal frequencies and those choice frequencies are
somewhat stable over long time periods, then it follows that each strategy (GEM with each different lookback
in months) will have a certain very very long run average level of outperformance relative to market.
Observing any one such lookback through time, the performance relative to market in any given year will likely be seen to have a somewhat bell-shaped distribution.
The more samples you take, the more your average level of outperformance would be expected to approach that number.

So, though it's true that a bad year is no more likely to be followed by a good year just because the first bit was bad,
the existence of a very very long run mean level of outperformance means that over time one *should*
expect mean reversion towards that lookback's level of improved CAGR relative to market.

In short, a really good year isn't to be expected after a really bad year. No short term mean reversion.
But really good years (relative to market) are expected to be as common as really bad years.
Slightly more so in fact, if it's a bell curve centred around a long run average positive level of outperformance.
So, pretty strong long term mean reversion in relative-to-market performance is expected.

If you just had a really bad year relative to market, or even if you didn't, you're likely to see a pretty darned good year relative to market in the next decade.
Those will all feed into some long run average level of outperformance, which we expect to slowly converge on that strategy's "true" number.

If the overall strategy is a bad one, that long run average outperformance might be tiny or zero.
That's a much more interesting question, but a hard one to answer.
I'm somewhat hesitant to put too much faith in momentum strategies that that worked in the last few bears, but not before.

Jim
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