Deemer on Technical Analysis: Expert Insights on Timing the Market and Profiting in the Long Run

CHAPTER 8MEANS AND MEAN REVERSION

Once you have a good base number set—whether that set is a simple dollar price or some sort of a ratio—one way to put the data into long-term perspective is with a mean, or arithmetical average.

The mean is simply the average of the data for a certain period of time. Figure 8-1 shows price to prior peak earnings from 1870 to September 2011, with the simplest mean line imaginable. Half the data points are above the line, and half below it.

Figure 8-1: Standard & Poor’s 500 Index (S&P 500) Price to Prior Peak Earnings With Mean Line, 1870–Present.

With the exception of a short blip in 2008, we have been above ...