Artificial Intelligence and Trading.

In the last few weeks, I have investigated a few AI(Artificial Intelligence) platforms in the hope that one or more vendors of this new technology could enhance my trading results.

The quick answer is maybe, but the research has found a troubling example of what could go wrong.

A new  ETF that is based on AI is was offered on October 17, 2017: AEIQ.

To quote from its informational site:

“The fund applies proprietary algorithms to artificial intelligence (AI) technology which can process over one million pieces of information per day to build predictive financial models on approximately 6,000 U.S. companies. The technology continually analysis data and models in its active stock selection process, and derives an optimal risk adjusted portfolio consisting of companies with high opportunities for capital appreciation. The fund is actively-managed and discloses all portfolio holdings daily.”

The informational information About AEIQ also states that “The system mimics a team of 1,000 research analysts working around the clock analyzing millions of data points each day.”

“Harnesses the power  of IBM Watson.”

The performance of this ETF should answer the basic question that I have had in my investigation; Does AI work?

The answer as it relates to the AEIQ ETF is sometimes yes, sometimes no.

The following graph of the relative performance of AEIQ and the SPY ETF, which represents the S&P 500 index starting in August 2020.

The AEIQ ETF started life on 10/17/2017 at an offering price of $25. On Friday, April 9, 2012, it closed at 39.48, an increase of 57.92%

The S&P 500 on 10/17/2017  was 256.25. It closed on Friday, April 9, 2021, at 411.49, an increase of 60.58%

The above chart, like all the other charts on this bog, has green, blue, and red vertical lines.  Green vertical lines are the place where AEIQ is performing, on a relative strength basis, better than the SPY ETF and AEIQ has positive momentum. Red vertical lines show the times that AEIQ is performing worse than the SPY on a relative strength basis and has negative momentum. Blue lines are the indication to close the current position.

The better way to use the AIEQ ETF would be to invest in  AEIQ  when, on a relative strength basis, it is stronger than the SPY ETF and AEIQ has positive momentum. The basic swing trading method I have been talking about in this blog since day one.

Gates Foundation Shuffles Portfolio

Dow Jones reported that The Bill & Melinda Gates Trust, which manages the funds of the foundation, exited positions in  Alibaba Group and Uber Technologies, halved its stake in Apple, and increased investment in Schrodinger in the fourth quarter.

The following shows the relative performance between APPL and SDGR from June 2020 until the close yesterday, February 22, 2021.

As per all my previous charts, Green vertical lines represent that the top security, in this case, Schrodinger, is, on a relative strength basis, outperforming AAPL. A red vertical line, the Second security (AAPL) is doing better.

Bravo to the trust, so far.

 

 

Relative Strength

In the many past posts, I have recommended that to be successful in swing trading, one has to be aware of the individual securities relative strength as it compares to some index of its peers.

The following chart is an example of  OIH which is the oil VanEck oil services ETF. I have compared this ETF to SPY, which represents the Standard & Poors 500 index.

 

The prices are as of the close yesterday, January 12, 2021.

The rules are very simple, and the action indicated by the up and down arrows reflects the result of following the rules.

  1. Buy when the target security is stronger, on a relative strength basis than the index.
  2. Buy ONLY when the target is stronger, has positive momentum, and the index is also going up.
  3. Close the position when any condition is violated. Shown by blue vertical lines.
  4. The rules apply to shorting when the actions are the opposite of the buy rules.

Market Timing and Other Examples at Year end 2020

In many past posts, I have tried to illustrate the relative strength of market sectors. The example below is as of year-end 2020.

In my previous post on Market Timing in early December, the illustration below shows that the market trend as portrayed by the ETF “SPY” is still intact. Prices as of the close on December 31, 2020

I am also showing below, another example of relative strength with positive momentum is APPL versus QQQ.

 

The rules in this example are pretty straightforward. Only buy APPL when it is outperforming QQQ AND QQQ is also in an uptrend.

The green arrows show these events. There are many different strategies that can be developed based on these events occurring.

Relative Strength with Momentum

Readers of the swingtrader.com blog will have noticed that the overall theme that I have proposed is that to be a successful swing trader one has to understand the principle of relative strength with positive momentum.

I originally proposed the concept in an e-book that I had offered in 2000. Because of my lack of web marketing, it was only downloaded a few times, although it was free.

Over the past few months, I have received multiple offerings of momentum services that offer similar strategies that I have been discussing on my swingtrader.com, relativevalue.com and perfectstormtradingstrategy.com websites for the past ten years or more.

One of the offers was a service, using only four ETF’s, that the provider stated would constantly beat the market.

Over the next few weeks and months, I am going to have on the swingtrader.com website an example, updated weekly or daily if necessary, of my 4 ETF strategy. If followed, the strategy should emulate the best of the services being offered. It is certainly not a recommendation of what to buy or sell, but an example of what can be accomplished by using a relative strength with momentum strategy. It is for illustrative purposes ONLY!

The four ETF’s chosen are the result of my own research. They should portray a representation of the changes in market sector rotation. The four ETF’s have a positive and negative correlation with each other. The ETF’s are displayed here on daily charts.

I will update the daily charts when appropriate.

Remember, Green=XLE, Energy. Red=XLY, Consumer Discretionary. Light Blue=XLU, Utilities. Yellow=XTN, Transportation.

Latest update July 11, 2019, 8:00 AM