Time Right (Again) for Mean Reversion?

By Frank Hassler, via ETF Prophet:

The two-day mean-reversion trade, i.e. RSI-2 or DV-2 has become very popular. Though  the performance of this trade has weakened lately (during late 2010-2011). So the twenty thousand dollar question becomes:  Is the edge of this trade gone or is it about to resume?

With this post I want to share an observation I’ve made by tracking my Trend Strength Indicator (TSI). TSI is a non-directional trend strength indicator. A lower TSI is indicating a tendency to mean-reversion while a higher TSI is indicating follow-through action. Read more about TSI [here].
Let’s start with some “chart porn”.

Above you see a SPY chart from 1998 until today (Nov. 2011). Prior 2009 TSI spent most of it’s time bellow 1.6. Post financial crisis 2008 it raised to the highest value ever of >2.0 and it allays maintained the level of > 1.6. However what you also can notice is the trend strength decrease lately. I can also confirm that by simply looking at the performance of my mean reversion strategy over the last few month.

Read the rest here, including a sample mean reversion strategy using TSI as a filter.