Reverting to the Average

The wheel of fortune is always spinning on Wall Street and some days it is in your favor and others it is not. With good research and strong companies hopefully you come out ahead and the wheel is in your favor more times than against it. I don't think you should be constantly trading stocks based on news and sentiment on the street. Many times it is based off fear and causes money in the hands of brokers and you losing money. However a way to play with stocks is the idea that all stocks will revert to the average gain at some point. In this case it would be the S&P 500. 

A stock that has shot up recently will probably come down some in the next few months off it lows. Not always the case and this is why it is a bad idea to gamble here. But it probably will go down, once it misses its earnings or just because people have moved on to the next hottest stock.

The beaten up stocks unless they are truly fundamentally flawed (where good research will help you out) will probably go up in the next couple of months and maybe even outperform the market. This is the same theory as the Dogs of the DOW but slightly updated and now can be used al the time. 

Those that are depressed will go up quickly and make a quick buck for the investor and others will quickly fall which if shorted would make money. Again though it does not always work and every investment is a risk because of uncertainty. Anything can happen but probably in the end everything will revert to the mean.