Having stock market in mind, in the previous post: “Price is right, part one.”, I stated that we should not think in terms of “the price went up/down too much” but that “the current price level is wrong since…. and the market is not getting it because…”, bearing in mind that Mr. Market is not a weak player to say the least.
In this post I back this claim with the examination of a trading strategy that ignores economical arguments, thus is only based on relative price moves. Say you believe my previous post is horseshit, wouldn’t it be nice to short the market if it’s “too high” and to long it when it “went down too much”? Fine!, let’s have a look at the performance of such a strategy.