Mean Reversion

March 5 (Bloomberg) -- European stocks fell on concern the plunge that wiped out $1.5 trillion in world market value last week may prompt more investors to sell equities and buy bonds.

March 2, 2007 5:20 PM ET (Briefing.com). This is what happens in market consolidations. Just as the bearish arguments were dismissed a month ago, bullish arguments now get no support. Everything is viewed in a bearish light.

The "pull to the right" (i.e. the probability of hitting the right hand side of the returns distribution before its left hand side) for equity markets has decreased in view of the current bearish light that can be observed on the equity market. Everything else being equal, Quantitative Asset Allocation Models have been increasing exposure to governmental bonds.

(Photo: The Construction of the Empire State Building, 1930-1931, New York Public Library)