RTM

10 Oct

Reversion to the mean is a powerful force in capital markets, but even more powerful in commodity markets and commodity related equities. The reason that RTM is such a strong force in these markets, as opposed to something like technology, is due to the physical nature of these markets. Assuming the particular commodity represents a critical and non-substitutable input into the production process, extended periods of falling or rising prices are met with significant shifts in capacity and production.  The trick in these markets is timing, given the long lead times generally associated with these shifts.  The mistakes that are often made when analyzing commodity prices from a fundamental perspective, is that the analysis assumes that changes in production and demand mimic the real-time changes in prices.

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