Financial Advisors

AI Risk Management Tool for Calling Stock and Market Trends

Investor sitting at computer

Is the bear back or are we entering a protracted, low-return market environment? Either way, active portfolio management can still potentially deliver superior returns even in difficult market cycles by “acknowledging and respecting price trends and profiting from the broad performance dispersion across stocks.”

This statement and a further call on our entering a new bear market wave comes from Institute member Rocco Pellegrinelli, CEO of Trendrating – a Swiss-based, global leader in the field of advanced analytics and AI-driven “trend capture” technology providing advanced price trend analytic solutions for active investment managers.

Their “trend risk rating” research and risk management tools were designed to “assess and validate” price trends in order to add an additional level of risk management and return opportunities for portfolio managers across all investment styles and methodologies. We asked him to further explain and share his viewpoints and price trend technology with us. 

Hortz:  On September 28, 2023, Trendrating posted a bold prediction calling the market top and to be prepared for the next down wave. As of today, your model is signaling the beginning of a new bear wave in the market. The price action in October seems to be backing up your prediction. What was the basis for this forecast?

Pellegrinelli:  Over the past years, we developed a multi-factor, AI-driven, price trend model designed to measure the money flows in and out of the market. The rationale is in assessing the buyers vs. sellers pressure on single stocks and on the market as a whole. At the proverbial end of the day, price trends are governed by the actual movements of capital.

During July and August, our model started issuing trend downgrades, an impending bear trend across an increasing number of stocks and a sign of spreading weakness. A few weeks ago, the model also downgraded the key benchmarks. According to our model, a bear trend is here.

Hortz: How can this price trend focused methodology fit with and help other analytical and risk management approaches?

Pellegrinelli: Trend assessment and validation is a powerful complement to any other analytical methodology as it provides an additional layer of sanity checks to stock and market volatility based on the actual price action. Acknowledging and respecting trends is a safe and prudent practice.

This new market cycle is exposing the limits of several conventional analytical approaches. Expanding market intelligence with smarter insights is mandatory in order to navigate the ups and downs of the new market regime. In new market cycles, it is reasonable to expect a sequence of up and down waves as we have seen in previous similar cycles (1969-1980 and 2000-2009) that recorded average yearly gains below 1% on indices.

Hortz: Not every investor thinks that analyzing trends is necessary or they use other methodologies. What is your take on this thinking?

Pellegrinelli: A number of people continue to depend on data, analysis and tools that worked in a bull trend. The cycle has dramatically changed and disregarding trends is now extremely risky. Any additional market intelligence that can enable a prompt, objective, logical evaluation of medium-term trends should be a must. The current market cycle will prove this point.

The longer it takes to accept this reality, the more damage will be produced. How can one navigate and profit from the performance dispersion across stocks without paying attention to the actual price trends?

Hortz: How does your model compare to other available research and risk management tools and approaches?

Pellegrinelli: It is possible to analyze trends in different ways. Momentum can help, but due to the fact that it requires a few months of confirmation, it can be late during sharp trend reversals. Technical analysis indicators work, but any indicator can prove to be erratic, depending on market patterns. Our model is different as it is based on a number of different parameters with a self-adjusting methodology to offer higher accuracy and a new paradigm on risk control.

Our 200+ institutional clients find the model very actionable thanks to the simple rating scale we introduced (A, B, C, D trend ratings). This approach also supports the rating of whole investment portfolios based on the risk of excessive allocation on falling stocks. The larger the exposure to securities in a downtrend, the bigger the risk of the overall portfolio to underperform. The converse is true that the larger the exposure to securities or indices in an uptrend, the better positioned the overall portfolio is to overperform.

Hortz: How would you recommend that asset managers use these newer trend rating tools?

Pellegrinelli: We feel that there is an inherent risk of relinquishing a portion of the gains achieved in 2023. To mitigate this risk, we recommend enhancing your risk control measures, utilizing advanced analytics and incorporating more sophisticated insights.

For those interested, we are delighted to offer a brief demo of our enhanced risk control platform and apply it focusing on the investment universe of your interest. During this session, you will have the opportunity to see firsthand how our advanced analytics can greatly assist you in navigating the recurring ups and downs in the current challenging market environment. 

The Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We operate as a business innovation platform and educational resource with FinTech and financial services firm members to openly share their unique perspectives and activities. The goal is to build awareness and stimulate open thought leadership discussions on new or evolving industry approaches and thinking to facilitate next-generation growth, differentiation, and unique community engagement strategies. The institute was launched with the support and foresight of our founding sponsors — Ultimus Fund Solutions, NASDAQ, FLX Networks, TIFIN, Advisorpedia, Pershing, Fidelity, Voya Financial, and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines). 

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Bill Hortz

Bill Hortz is an independent business consultant and Founder/Dean of the Institute for Innovation Development- a financial services business innovation platform and network. With over 30 years of experience in the financial services industry including expertise in sales/marketing/branding of asset management firms, as well as, creatively restructuring and developing internal/external sales and strategic account departments for 5 major financial firms, including OppenheimerFunds, Neuberger&Berman and Templeton Funds Distributors. His wide ranging experiences have led Bill to a strong belief, passion and advocation for strategic thinking, innovation creation and strategic account management as the nexus of business skills needed to address a business environment challenged by an accelerating rate of change.

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