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Fair enough!
I'm sure we could find studies and books supporting both views, as well as a third one - remember Burton Malkiel? He would disagree with both me and with Kaufman. He wrote the famous book, A Random Walk Down Wall Street, which introduced the Efficient Market Hypothesis. By that view, neither a mean reversion or trend following strategy can work in any market because prices are essentially random. Of course I disagree with that view, as I'm sure Kaufman and most traders do as well.
So we're all in our various camps with our various studies and books that purport to support our outlook. And it will always be that way. The cool thing is there are ways to succeed with either approach. Jack Schwager, the author of the Market Wizards series of books said, "There are a million ways to make money in the markets. The irony is that they are all very difficult to find."
I'm certainly not going to beat up on Mr. Kaufman and try to "debunk" his findings. For all I know, his research methods are perfectly sound, and probably show what he says they do. But different sets of data will produce different results.
So all I can do is point you to the work I did, with the data that I used. I'll also point out that my conclusions aren't just based on the data analysis, but are grounded in a set of logical arguments about what's fundamentally going on in each market. So I have not only the results, but an explanation for the results as well.
I'll deal with the broad equity markets very briefly. Look at any chart of the DJIA from 1790 (I know it wasn't a thing until the late 19th century, but analysts have been able to backdate it) until now. That's clearly an upwardly biased market. And as I said in the first post, there's a logical reason for that - the equity markets are actually charting the upward progress of human technological civilization and its creation of wealth.
As far as the Forex market goes, I'll point you to a couple of my books - Beyond The Big Mac and Weekly Price Action Statistics. Both describe research that supports the mean reversion view in Forex, and the first one provides a detailed explanation for why that should be the case. Each one provides full details on the datasets, so anyone could duplicate the research for themselves.
Hope this helps, and as always, keep pipping up!
Greetings!
I had some further thoughts on this question, so here I am replying to - myself? Ok. Well anyway...
I gave the equity market short shrift in the last post, and didn't really address the research in individual stocks at all. So I'd like to indulge in a little idle speculation about why different researchers may come up with different conclusions about whether individual issues tend to trend or revert. Keep in mind that this isn't based on any research of mine - my work has mainly been with the Forex market, not equities. So as I said, it's just speculation on my part.
So I'll contrast two researchers who have done statistical work in individual equity issues - Perry Kaufman as discussed above, and William J. O’Neil, the author of several books on stock investing and the founder of Investor's Business Daily. Kaufman came to the conclusion that individual issues tend to revert to the mean, while O'Neil's research led him to a momentum based approach - the "buy high and sell higher" approach of the CANSLIM method. So why did these two come to opposite conclusions?
I know I've said this twice already, but I'm just speculating here. However, I think this is a very plausible explanation. I'm guessing that these two researchers were looking at qualitatively different sets of issues. I'm familiar with O'Neil's approach, and he was concerned mainly with fundamentally strong stocks - that's what CANSLIM screens for. Kaufman, on the other hand, may have based his research on a much wider set of issues - including OTC small caps, bulletin board issues, and maybe even pink sheets.
So O'Neil found that his universe of stocks tended to trend. That's because he was looking at issues that were fundamentally strong - good current & annual earnings, new exciting products and/or management, institutional sponsorship, and so forth. For obvious reasons, a momentum based trend following approach works better here.
But if Kaufman was indeed working with the complete universe of stocks, including the lower quality issues and even so-called "penny stocks," why would this tend to skew the result more toward a mean reversion behavior? Well, almost 20 years ago, I spent a year trading these kinds of markets full time, and I have a pretty good idea of why they tend much more toward mean reversion.
I learned during this time that the way to succeed with these lower quality stocks wasn't with fundamental analysis or with technical analysis (at least not exclusively). It was with what I used to refer to as "scam analysis." Many of these stocks are often subject to "pump and dump" schemes whereby operators first accumulate large positions in these relatively unknown issues, and then (illegally I believe) manipulate price upwards through the spreading of rumors and hype (the pump). As the general public gets excited about the stock, driving its price higher, the pump and dump crowd is now selling out to them, profiting from the pump and leaving the public holding the bag after the dump. So the way we (legally) made money in this market was to understand that these schemes were going on, try to identify them in the early stages (using TA), and then ride the coattails of the scammers. We wouldn't get married to any of these positions or get caught up in the great sounding stories. To us, each of these penny stocks was a POS (Piece Of ...ummm, Sewage!! yeah, that's it).
So back to mean reversion behavior. That's the kind of price action you see all the time with lower quality issues. Not just because of the pump and dump kinds of schemes where stocks would rise spectacularly then crash back. But also because of the more general psychology of speculators in this market. Even when there's no actual pump & dump scheme, small cap traders often get caught up in the "story" of the latest flavor of the week stock. As this catches on, the hype drives the stock up. But as time goes on and the "story" doesn't pan out (the wells come up dry, the mines produce nothing, the big invention doesn't sell well, or whatever), these stocks tend to come crashing down. And there you have it - big runs followed by spectacular crashes equals mean reversion.
So there you have it. One researcher confines himself to a subset of stocks that meet certain criteria, and finds trending behavior. Another researcher looks at the whole market, including the lower quality stocks that tend to soar and then crash, and sees mean reversion.
Just a guess, but it's a plausible one.
I posted links to a couple of my articles in the first post, but I really can't blame people for not reading through them - they're kind of long (especially the second one). 