Live Test of Short-term Reversal

Short-term reversal is a widely accepted stock return anomaly, with the long-only version glibly termed “buy the dip.” Is short-term reversal readily exploitable? As a live test, we look at the performance of Vesper U.S. Large Cap Short-Term Reversal Strategy ETF (UTRN). This fund seeks to capture bounces of stocks with recent sharp declines by each week:

• Calculating for the 500 largest U.S. stocks a metric similar to the Sharpe ratio but using an asymmetric volatility to find overreaction dips in downtrending stocks (the Chow ratio).
• Initially buying the 25 stocks with the lowest Chow ratios.
• Selling any holdings for which the Chow ratio has risen out of the bottom 50 and replacing them with bottom 25 stocks.

The restriction to large stocks and the differing buy and sell rules suppress trading frictions/portfolio turnover. The benchmark is SPDR S&P 500 ETF Trust (SPY). Using monthly dividend-adjusted returns for UTRN and SPY from the inception of the former in September 2018 through August 2024, we find that: (more…)