Benefits of unemotional systematic approaches in turbulent times

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Looking for downside protection and differentiation in bearish markets?

This current stock market environment is dominated by pronounced uncertainty, caused by the COVID-19 virus and the OPEC dispute, which tempts people to make emotional decisions. Out of fear of losses, investors sell shares, thereby triggering a positive feedback loop in which cause and effect interlock because everyone is doing the same thing.

It is precisely this herding behaviour which, however, also provides opportunities for protection on the downside if one acts differently. And this is our strength. At SIMAG, we pursue an unemotional systematic approach that is based on scientifically determined success factors in order to profit from uncertainties in the market.

Our artificial intelligence model is scoring and ranking more than 7’000 stocks daily – unemotionally, systematically and unbiased. The model turned bearish already in the 4th quarter of 2019, and our SIMAG scores told us to be positioned defensively as a consequence. However, as markets corrected heavily in the past few weeks and particularly in the past days we’ve seen that it pays to be exiting a party a bit early. Drawdowns can be reduced and positions in crowded stocks can be avoided.

So what does the data tell us? In the US, Consumer Discretionary has become a lot more attractive and Utilities have become a lot more unattractive since the recent market high. The visible change in scores from the 6th to the 9th of March coincides with drastic changes in volatility, skewness, kurtosis on the market and sector level, and to a lesser degree momentum on the stock-level.

Looking at what the data tells us on sector level in Japan and China is quite different. Energy scores in US and Japan are almost inverted which could make sense since Japan imports all its oil.

We invite you to also check out our monthly report in collaboration with ETH Zurich – the Global Bubble Status Report. If you would like to learn more about this and our capabilities, please contact us.