This week, we’re trying out video content in Market Minute for the first time.

So far, I’m enjoying it. Make sure you let me know right here if you are, too.

Yesterday, I explained that the market is in the process of transitioning from a momentum-based type of market rally to an ebb-and-flow type of environment.

This means the strategies that worked in the previous six months of this year probably aren’t going to work so well in the next six months.

Fortunately, that means we’re moving back to my favorite trading strategy.

Check out my video below for more, or you can scroll down to read the transcript.

Transcript

Hi. Welcome back to another video version of Market Minute. Now, the last time we got together in the last video we did, we talked about how the market right now is in the process of transitioning from a momentum-based or a momentum-fueled type of market rally to more of an ebb-and-flow type of environment. And the last time we saw that, and to such a degree, the last time we’ve seen such a momentum fueled market was back in 2021 and also in 2010, and we talked about how we’re in this transition.

And so the strategies that worked in the previous six months of this year probably aren’t going to work so well in the next six months. And maybe throughout 2025. The strategies that are going to work best are those strategies that worked back in 2011, after the momentum market of 2010 and back in 2022 and 2023, after the momentum-fueled market of 2021.

Buy Low, Sell High

Specifically a reversion-to-the-mean type of strategy. That’s just a fancy way of saying we’re looking to buy low and sell high, you know, in a momentum-based market, you buy high and sell higher or you short low and you cover it at an even lower point. Well, that’s abnormal. I think I mentioned that the last time we got together, a more normal type of a market is an ebb-and-flow market where prices go up, pulled back a little bit and then go up again, or the fall, pull up a little bit and then drop again.

And so when you’re using a reversion-to-the-mean strategy, all that means is basically a stock will find its normal level, and any time it moves too far away, above or below that normal level, you have an opportunity to make a trade based on the stock coming back to that normal level.

So to break it down as simply as possible, you know, if the normal level’s here and the stock is declining, it’s dropped all the way down to here, you look for an opportunity to buy the stock with the expectation a little snap back to its normal level.

Or if the stock’s way up here, you look at an opportunity to short the stock with the idea that the stock is going to snap back down to its normal level. That’s a simple reversion-to-the-mean type of strategy.

There’s a lot of other factors that can go into it, but that’s pretty much the cut and dry part of it. And I think that’s the type of strategy that’s going to work out best for the next six months, and maybe for the next year-and-a-half, if history is any sort of a guide. Now, as a trader, I utilize a lot of different trading strategies.

Reversion to the Mean

But my absolute favorite is the reversion-to-the-mean, simply because it makes the most sense. It resonates well in the way that my mind thinks, and I think most people would probably agree with that as well. So let me give you an example of one that we use in a in a service of mine. Again, I’m going to struggle to share, share my screen here.

This is a stock, this is Kraft Heinz.

Now, this is a trade that we made at Jeff Clark Trader, that’s my entry-level subscription service.

Now if you take a look at this chart, the blue line going through the middle of the chart, that’s the 50-day moving average that I consider is the normal level for Kraft Heinz a lot of stocks, the 50-day moving average is going to be that normal level, some stocks maybe not.

You know, if you look at something like an Nvidia, maybe the 20-day exponential moving average is the normal level. For the S&P 500, maybe the 10-day moving average is the normal level.

So you have to experiment a little bit and follow things along for a while to, to see which stocks respond to which moving average.

Kraft Heinz seems to respond well to its 50-day moving average. What I mean by that is, anytime it gets too far above, it tends to come back towards the line. Anytime it gets too far below, it tends to bounce back towards the line. Now, Kraft Heinz hasn’t done anything this year.

I mean, you can see where it started the year back in January, it was around $35 a share.

And basically when we looked at it in July when we decided to make a trade, it was down to $32. So with the rest of the market ramping up and moving higher all year, Kraft Heinz has been, for lack of a better word, it’s been a dog.

So we were taking a look at it with the anticipation of a reversion-to-the-mean type of a move.

And I look at a number of other indicators and we can’t really get into that today because this is called Market Minute, it’s not called Market Hour, so we’ll just we’ll deal with the 50-day moving average as the sole indicator here.

But there are a lot of alternative indicators that you can use to determine when is a good time to place a trigger on a trade.

But in this case, we took a trade. You see that little blue circle in the middle part of July?

That’s when we decided to buy a call option on Kraft Heinz, with the expectations that it would go back up towards its 50-day moving average. And, you know, we got a little bit lucky and we got a little bit skillful as well.

it happened and it happened in less than a week, we got the move we were looking for. The stock came back up to around, I don’t know what was that, $34 a share or so. And it was only a 5% move in the stock.

But the options that we did, we were able to book a 97% gain on that.

That was a pretty good deal. Now, again, taking a look at this chart, you have to look at the history of Kraft Heinz. And if you do, you determine that very rarely does Kraft Heinz trade more than 5% below or above its 50-day moving average before it turns around and comes back to it. So when I was looking at this, deciding to make the recommendation, that was basically the parameter.

The main parameter behind this trade was to be able to buy Kraft Heinz 5% or more below its 50-day moving average, with the expectations that it would come back up. Now, if I was really sharp on this, I would have entered another trade to get back in when Kraft Heinz formed a higher low.

But that’s something that perhaps will go into in more detail at a later date.

Let me show you another example where we did have a couple of trades, because and this is sort of important in a reversion-to-the-mean type of environment, you do, you don’t get an immediate exact move back towards. This is a very good example of an immediate exact move, but it doesn’t happen often that way. Oftentimes what happens is you get, partial moves.

You get a little bump up and then reverse and bump up again or reverse. And so you’ll have multiple opportunities to trade.

When you have a market that is transitioning from one environment to the next, in this case from momentum environment to a more ebb and flow environment, there’s a lot of stickiness that goes on, for lack of a better word. So what often happens is you have to, reduce your expectations on a trade.

Take the Partial Move

You’re not going to hit a homerun every single time you go up to bat. Instead, you have to be willing to take the 30%, the 40%, to 50% gainers and do that several times on an issue, rather than swinging for the fence and getting 100% or more.

Again, I like the idea of getting 100%, but oftentimes in a transitional type of a market, you’re not going to get that.

What you do get, though, is you get a lot of opportunities to trade the same stock as it reverts back to the mean multiple times, and you can score profits several times doing that and do it enough, it makes a very, very big difference on the portfolio.

Next time we get together, we’ll talk a little bit more about the strategy and some of the other elements that go into it.

But for now, this is probably enough to get you started. One thing I will point out, if you’re interested in a reversion-to-the-mean strategy, I have started to add my favorite reversion-to-the-mean candidates to my Twitter feed.

Actually, I guess it’s the X feed, if you will. My site is @JeffClarkTrader, and you can look me up there and you can see the five stocks that I think have the best long potential for reversion-to-the-mean.

And the five stocks that I think have the best short potential. And we update that every week. So take a look at that and then I’ll see you next time we do a video here in Market Minute.

Bye bye,

Jeff Clark
Editor, Market Minute