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AI's Perspective on the Stock Market Rally


a shocked and scared cow and a greed scale

Introduction

The stock market's recent rally has been influenced by the excitement around Artificial Intelligence (AI). What would an AI tool say about this rally? In this post, we'll explore insights from Danelfin's predictive technologies and compare them with current market data and investor sentiment surveys.

The AI's Analysis

Danelfin's AI-driven analytics tool uses AI, machine learning, and big data to analyze vast amounts of data. This gives retail investors insights similar to what institutional investors have. The tool calculates an AI score between one and ten, indicating a stock or an ETF's potential to outperform a market index in the next three months. This score is based on daily analysis of over 10,000 features per stock or ETF, considering more than 900 indicators.

Understanding the AI Score: The AI score isn't a mere average of subscores. It's a predictive score based on all available data for a stock or ETF. For instance, assets with an AI score of ten offer the best potential returns. Scores ranging from seven to ten can be viewed as a buy, while scores of three or below suggest a sell.

AI score, AI rating

Current AI Recommendations: Presently, Danelfin tracks 2,045 listed ETFs. Notably, eight of its top ten picks are bearish ETFs, which profit when stock markets decline. The current top pick is the Proshares UltraShort S&P 500, an ETF that inversely tracks the daily performance of the S&P 500 Index.

stock market

The last time it had a score of ten was on February 1st, 2022.

Historical scores

At the time, the S&P 500 was in the early stages of a sharp selloff, so the AI score of ten turned out to be a good indicator.

S&P500 Index

Market Positioning Insights

It's crucial to view AI scores in conjunction with other metrics. The National Association of Active Investment Managers (NAAIM) produces the NAAIM exposure index, which offers insights into the stock market exposure of its members.

NAAIM number

Current Exposure: The exposure is currently at its highest level since November 2021, just before a significant stock market downturn. This indicates that most professional fund managers, who were previously underweight on stocks, have been purchasing stocks, driving the market rally.


Fear and Greed Index: This index currently indicates extreme greed, which is typically a warning sign. Five out of the seven factors it considers are pointing to extreme greed, suggesting that the market might be stretching too far.

Section 3: The Opportunity Ahead

Warren Buffett famously advised to "be fearful when others are greedy and greedy when others are fearful." So if you’re leery about chasing the stock market at current levels, you might instead look to hedge your exposure using S&P 500 Index “put” options – and, good news, they’re cheap right now, with volatility so low and investors so bullish. Given the current market sentiment, caution might be warranted, However, this doesn't mean one should completely avoid stocks. The recent decline in inflation could be beneficial for the stock market and the broader economic outlook. While the rally has predominantly been driven by large-cap AI-related stocks, investors might consider diversifying into stocks and sectors that haven't performed as well this year. perhaps considering the Invesco S&P 500 Equal Weight ETF (RSP; 0.2%) Sometimes, going at least partially with the greedy consensus can be a good way to make money.

Conclusion

While the current market sentiment leans heavily towards greed, it's essential for investors to approach the market with a balanced perspective, considering both the opportunities and potential risks. As always, diversification and a long-term perspective remain key to successful investing.


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