Dive deeper into the world of investing and applied AI.

In recent years, the stock market’s gains have been driven largely by a select group of powerhouse companies known as the "Magnificent 7." This elite group—comprising Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, and Tesla—not only dominates their respective industries but also represents a substantial portion of the S&P 500’s weight. Their performance has become a significant force behind market returns, often making up the bulk of gains in the broader index. Here, we’ll explore how these companies achieved their dominance, why they play such an influential role in stock indices, and how alphaAI offers a unique approach to access their growth potential through the FNGU leveraged ETF—while using automated risk management to guard against volatility.

‍

Why the Magnificent 7 Have Outsized Influence in the S&P 500

The S&P 500, one of the most widely-followed benchmarks for U.S. stock performance, is a “market-cap-weighted” index. In a market-cap-weighted index, each company’s influence is determined by its market capitalization (the total value of its shares). Larger companies have more sway over the index, meaning that changes in their stock prices can dramatically affect the overall performance of the S&P 500.

‍

For instance, if a company with a $3 trillion market cap like Apple sees a 2% increase, it will have a larger impact on the S&P 500 than a company with a $500 billion market cap experiencing the same percentage gain. This weighting mechanism makes the index highly sensitive to the performance of its largest constituents, particularly the Magnificent 7, whose combined weight accounts for over 30% of the S&P 500’s total.

‍

To put this concentration into perspective, if the S&P 500 were equal-weighted—meaning each company contributed equally to the index—returns would look much different. Historically, the S&P 500 Equal Weight index has underperformed the standard S&P 500 because it doesn’t benefit as heavily from the gains of these top companies. Here’s a comparison of returns over various periods, illustrating the impact of market-cap weighting:

‍

‍

This difference showcases the power of the Magnificent 7. In recent years, these companies have consistently driven higher returns for the S&P 500, leading to impressive gains in a concentrated manner that might otherwise not be possible with a broader base.

‍

How the Magnificent 7 Became Market Titans

The Magnificent 7 companies have achieved remarkable growth by leading innovation in their industries and maintaining competitive advantages that fuel their long-term value creation. Here’s a closer look at some of the stocks that have contributed to the S&P 500’s success:

‍

• Apple (AAPL): With a decade-long return exceeding 1,000%, Apple has transformed from a hardware maker into a global leader in technology and services, continuously outperforming the broader market.
• Microsoft (MSFT): Known for its evolution from software to cloud computing, Microsoft has expanded its value, generating 11x returns over the past decade.
• Nvidia (NVDA): A frontrunner in AI and graphics processing, Nvidia’s explosive growth has brought returns of nearly 12,950% since joining the S&P 500 in 2001.
• Tesla (TSLA): Revolutionizing the automotive industry with electric vehicles, Tesla’s stock has skyrocketed by over 800% since 2020 alone.

‍

Each of these companies has not only contributed significantly to the tech industry but has also enhanced overall S&P 500 performance by adding enormous value.

‍

Leveraging the Magnificent 7 with FNGU and alphaAI

Investing in the Magnificent 7 individually can be a costly endeavor, given their high share prices. However, leveraged ETFs offer an efficient way to gain exposure to this group. alphaAI’s portfolios leverage the FNGU ETF, which tracks the performance of the Magnificent 7 with the added benefit of three times the daily returns. In other words, FNGU offers leveraged exposure, amplifying the gains (and potential losses) of these tech giants on a daily basis.

‍

FNGU is an appealing option for investors looking to capitalize on the rapid growth potential of the Magnificent 7 without the need for direct, individual stock purchases. However, while leverage can magnify gains, it also increases exposure to market volatility, making it crucial to have an intelligent risk management strategy in place.

‍

How alphaAI’s Dynamic Risk Management Maximizes Gains and Mitigates Risks

alphaAI’s platform combines FNGU’s leverage with a powerful, AI-driven risk management system that actively monitors and adjusts portfolios to capture gains while minimizing potential losses. Here’s how alphaAI manages this delicate balance:

1. Dynamic Portfolio Adjustments: alphaAI’s platform isn’t a static robo-advisor. It continuously monitors hundreds of data points across the market, adapting portfolios in real time. In bullish markets, alphaAI may take an aggressive stance, maximizing the leveraged returns of FNGU, while in volatile markets, it moves to a conservative or hedged state to protect investor capital.
2. Automated Risk Management: Unlike traditional robo-advisors, which may only provide automated portfolio construction, alphaAI actively manages risk. Our AI-driven system detects market changes quickly, rebalancing portfolios to reduce exposure during downturns and taking advantage of favorable conditions for growth. This proactive approach helps alphaAI harness the Magnificent 7’s upside while buffering against market corrections.
3. Adaptive Portfolio States: alphaAI’s portfolios have four distinct states—surge, steady, cautious, and defense—designed to respond to market dynamics. During market rallies, alphaAI can adopt an aggressive position to maximize growth through FNGU. In uncertain markets, the platform shifts to a more conservative approach to protect assets, giving investors the benefit of growth-oriented exposure without excessive downside risk.

‍

Why alphaAI is the Smarter, More Responsive Way to Invest

For investors aiming to capture the growth potential of the Magnificent 7, alphaAI offers a powerful solution that combines the high growth of FNGU with disciplined, AI-driven risk management. By leveraging exposure to the market’s top-performing companies and employing a dynamic risk approach, alphaAI provides a unique opportunity to benefit from these tech giants without needing to monitor and adjust positions constantly.

‍

alphaAI’s model allows retail investors to experience the advantages of institutional-grade portfolio management. Unlike static robo-advisors, alphaAI adapts to changing market conditions, actively managing portfolios for optimal performance. This means investors can participate in the Magnificent 7’s growth story with confidence, knowing alphaAI’s AI-driven system is there to protect their capital.

‍

Introduction

Congress may not be the most popular institution among Americans, but for certain investors, it can be a source of profitable investment insights. Through the rise of the politician stock tracker industry, investors can now access tools that follow Congress stock trades, with Nancy Pelosi's trades garnering particular interest. Platforms tracking the trades of high-profile lawmakers have grown in popularity, driven by the belief that these politicians hold an informational advantage in the market.

‍

Thanks to the STOCK Act, Congressional members must disclose their stock transactions within 45 days, giving the public a view of Congress stock trades, albeit delayed. Despite this lag, the allure of mimicking trades by politicians—especially those of Nancy Pelosi—continues to grow. However, our studies have shown that copytrading politicians tends to underperform the S&P 500 due primarily to timing issues. In this article, we’ll dive into the pros and cons of politician stock trackers and introduce alphaAI’s data-driven alternative to simplistic copytrading.

‍

The Rise of the Politician Stock Tracker Industry

The STOCK Act, a law aimed at curbing conflicts of interest, requires politicians to disclose their trades, inadvertently sparking the politician stock tracker industry. With platforms like Unusual Whales and Quiver Quantitative, investors can follow the moves of lawmakers who are sometimes seen as “insiders.” These tools offer users insight into Congress stock trades across various sectors, popularizing the idea that tracking these trades might provide a market edge.

‍

Some financial firms have even created ETFs based on Congress stock trades. For example, the NANC ETF mimics Democratic lawmakers’ trades, with Nancy Pelosi’s trades often highlighted due to her reputation for tech-heavy picks. With Pelosi’s involvement in major stocks like Nvidia, Apple, and Amazon, she has become a focal point for investors who want to emulate her portfolio choices.

‍

The Allure and Risks of Congress Stock Trades

High-profile figures like Nancy Pelosi, whose trades are heavily covered by politician stock trackers, appear to have an edge. One notable example is her 2021 investment in Nvidia, which saw massive gains as the AI industry and tech sector boomed. Nancy Pelosi trades like these often focus on high-growth tech companies, contributing to her reputation for strong returns. 

‍

However, copytrading Congress stock trades come with built-in risks. Here’s why copying them may not be as beneficial as it seems:

1. Disclosure Lag: By the time Congress stock trades are disclosed (up to 45 days after execution), the market has often moved. This lag can make it challenging to capture the same returns, making many politician stock trackers less effective.
2. Unpredictability: Lawmakers’ trading motives can vary widely. Many trades by members of Congress are made with unique personal or political motives that may not align with regular market trends.
3. Lack of Comprehensive Risk Management: While politician stock trackers might help investors spot trends, they often lack risk management tools, leading to significant losses if markets turn volatile.

‍

Nancy Pelosi Trades and the Copytrading Phenomenon

Pelosi’s trades—particularly in technology stocks—have spurred increased interest in politician stock trackers and specific funds modeled after her trades. Her Nvidia purchase in 2021, for example, sparked a wave of similar trades among retail investors who saw tech’s potential for exponential growth. While it’s true that Congress stock trades can deliver impressive gains, these results are typically not repeatable due to market timing and disclosure lags. According to Quiver Quantitative, a Nancy Pelosi copytrading strategy has actually underperformed the S&P 500 since 2019. In our analysis, we found the primary reason for this underperformance to be due to data lag. Pelosi typically discloses her trades 45 days after they’re made, and by that time, the market has already moved significantly. Copytrade investors bear the brunt of the pain as they miss out on gains or are too late to exit a position. 

‍

If copytrading is not a viable investment strategy, the question arises: How can investors use data from politician stock trades to their advantage? Well, what many investors fail to realize is that Pelosi’s stellar stock market performance is not necessarily due to her prowess as an investor or even her supposed access to insider information, but rather her exposure to the “Magnificent 7” (top-performing tech giants). As of the time of writing, 99% of Pelosi’s portfolio is concentrated in high-flying tech stocks like Apple, Amazon, Google, Salesforce, Nvidia, Netflix, and Crowdstrike. These stocks comprise a significant portion of the S&P 500 and Nasdaq-100 and have driven most of the gains in the stock market over the past several years. Savvy investors realize that rather than risk data lag from copytrading Nancy Pelosi, they can get the same industry exposure by investing in broad market ETFs that track the Nasdaq-100 and Magnificent 7.

‍

alphaAI’s Smarter Approach to Politician Stock Tracker Insights

At alphaAI, we recognize the appeal of politician stock trackers and understand the intrigue surrounding Nancy Pelosi’s and other Congress stock trades. However, rather than simply mirroring these trades, we’ve developed a data-driven strategy that leverages the insights from Congressional portfolios while addressing their key limitations.

‍

At alphaAI, we extrapolated Nancy Pelosi’s trades into a portfolio of leveraged ETFs with the equivalent sector, industry, and Magnificent 7 exposure. We then enhanced it through several layers of automated, AI-driven adjustments:

1. Leverage: Our system uses leveraged ETFs to amplify exposure to high-performing sectors like tech, allowing for greater gains while maintaining flexibility across market conditions. This setup lets investors benefit from sector trends without being wholly dependent on individual stocks.
2. Automated Risk Management: Our Investment AI adjusts user portfolios based on market dynamics, shifting between conservative and aggressive stances to protect investors from volatility—a crucial feature missing from the standard politician stock tracker products.
3. Hedging: Unlike basic politician stock trackers, alphaAI incorporates hedging to guard against market downturns, ensuring that investor capital is preserved during uncertain times.
4. Investor Control and Customization: alphaAI allows users to adjust risk settings, so you’re not just following a politician’s portfolio passively but actively managing your investments with industry-leading tools.

‍

Conclusion: Going Beyond Politician Stock Trackers with alphaAI

While tools that track Congress stock trades and Nancy Pelosi’s trades offer insight into high-profile portfolios, they lack the sophisticated risk management and adaptability that true investors need. alphaAI takes the best of what politician stock trackers reveal and combines it with AI technology, creating a more robust investment option that’s dynamic, protected, and intelligent.

‍

If you’re ready to go beyond the basics of a politician stock tracker and invest with a strategy that’s designed to adapt and grow, alphaAI is here for you. Our approach isn’t just about following trends—it’s about making smart, informed investments that can withstand market changes. Start your journey with alphaAI today and see how AI-driven portfolio management can redefine your investing experience.

As Election Day approaches, investors are on edge, uncertain how the election results will affect the markets. Polls show a narrow split across swing states, with many traders preparing for potential delays and disputes over the results. However, while short-term volatility is all but guaranteed, historical data shows that over the long term, who wins the White House has a limited impact on market performance. Here’s why investors should keep their focus on the bigger picture.

‍

Navigating Short-Term Volatility: What to Expect Post-Election

With polls revealing a split electorate and the VIX (volatility index) remaining above 20—a level that signals market jitters—Wall Street is preparing for potential market turbulence. Treasury yields are down, and the dollar has recently seen its largest drop since August. Options markets are showing a defensive stance, indicating that many investors are bracing for the possibility of prolonged uncertainty. If the election results are delayed or disputed, markets could see heightened volatility in the weeks to come.

‍

Compounding the election's immediate effects, the Federal Reserve’s interest rate decision and subsequent press conference are scheduled for Thursday, just days after Election Day. The Fed’s insights on future interest rates will influence markets, as will earnings reports from major companies. Chris Larkin from E*Trade describes this as “not just any week,” highlighting how the timing of multiple economic events could amplify the market’s reaction to the election outcome.

‍

Yet, while the potential for sharp movements exists in the short term, these election-related disruptions often fade. Bespoke Investment Group data shows that the S&P 500 has typically gained 3.9% on average by the end of election years, with positive returns recorded in six out of the last eight elections. As history suggests, while Election Day may bring volatility, the market usually finds its footing.

‍

Long-Term Perspective: Why the Election Won’t Change the Big Picture

Despite the current buzz around election outcomes, long-term investors have little reason to worry. Historical data tells a reassuring story: presidential terms generally don’t dictate the overall trajectory of the market. Over the past decades, markets have shown resilience regardless of which party holds the White House. Deutsche Bank’s analysis revealed that 13 of the last 15 presidents saw average annual stock returns ranging from 10% to 17%, regardless of party affiliation. Such results underscore the fact that market performance is shaped more by economic fundamentals than by politics.

‍

The stock market’s resilience is rooted in underlying drivers like GDP growth, corporate earnings, and inflation—all factors that aren’t closely tied to political cycles. Megan Horneman, Chief Investment Officer at Verdence Capital Advisors, aptly put it: “Market performance has more to do with economic fundamentals and the earnings outlook than it does with who sits in the White House.” This view is echoed by trends over the last eight presidential elections, where the S&P 500 averaged a 6.6% gain in the six months following Election Day, compared to just 1.5% in the six months leading up to it. These numbers illustrate a fundamental truth: the market tends to stabilize and grow over time, regardless of the administration.

‍

Staying Focused on Long-Term Goals: alphaAI’s Approach

For investors wondering how to navigate these turbulent times, focusing on long-term goals remains the best approach. Here at alphaAI, our adaptive portfolios are designed to take advantage of market fundamentals rather than react to short-term political shifts. Here’s how we suggest staying steady in the days and weeks to come:

1. Ignore the Noise: Short-term volatility is common around election cycles, but historical patterns show that both Democratic and Republican administrations have overseen strong stock returns. A steady approach rooted in broader economic trends generally outperforms reactive strategies.
2. Hedge Against Uncertainty: Rather than making short-term bets tied to political outcomes, alphaAI’s adaptive portfolios focus on hedging against downside risk. By automatically adjusting allocations based on market conditions, our technology helps protect against significant losses and provides a foundation for steady growth, regardless of political cycles.
3. Remove Emotion from Investing: Election seasons often heighten emotions, but reacting to daily news can lead to impulsive decisions that derail long-term goals. alphaAI’s AI-driven platform removes emotion from the equation, using data-driven analysis to make calculated adjustments in response to real market shifts rather than momentary headlines.

‍

Final Thoughts: Staying Steady Through Election Cycles

For long-term investors, election seasons bring moments of uncertainty, but the bigger picture remains clear: economic fundamentals drive market growth, not election results. At alphaAI, our technology-driven approach is rooted in this principle, offering clients an investment strategy that stays focused on fundamentals, no matter what happens on Election Day.

‍

Election years can feel turbulent, but by keeping your focus on a solid, data-driven strategy, you can navigate the noise and achieve your long-term financial goals. Presidents may come and go, but well-built investment plans stand the test of time.

San Francisco, CA – October 24, 2024 – Today, alphaAI is thrilled to announce the official launch of its public beta, marking a significant milestone in its mission to revolutionize the way individuals invest. As an AI-driven investment platform, alphaAI quantitative, high-upside investment strategies that dynamically adjust to market conditions in real-time.

‍

The public beta release introduces a fully functional web app where users can benefit from a personalized investment experience like no other. The platform’s intelligent onboarding process evaluates each user’s investor profile, goals, and risk tolerance, delivering a personalized investment strategy that keeps portfolio volatility and drawdowns within a user-defined range. To do that, this industry-leading technology adjusts dynamically to market movements, maximizing gains during strong periods and protecting against losses in weaker markets. Uninvested cash is automatically allocated to alphaAI’s Smart Stash feature, which earns 6.61% APY (at the time of writing), the highest yield in the market.

‍

Key Features of alphaAI’s Public Beta:

• Personalized Onboarding: alphaAI’s system quickly assesses your investor profile, goals, and risk appetite to craft a bespoke investment strategy.
• Quantitative, High-Upside Investment Strategies: alphaAI caters to investors with a higher risk appetite who are looking for larger potential gains than other automated investment products on the market. 
• Dynamic Portfolio Management: alphaAI’s proprietary Investment AI continually monitors the market and automatically adjusts portfolios in real-time to capitalize on opportunities and manage risk.
• Smart Stash: alphaAI users automatically earn 6.61% APY (at the time of writing) on uninvested cash.
• Market Risk Monitor: Real-time market risk scores powered by billions of data points from every US-listed stock.
• Full Transactional Functionality: Investors can easily deposit, withdraw, and set up automatic contributions — all within the app.

‍

“We built alphaAI to give every investor access to quantitative investment strategies typically reserved for those on Wall Street,” said Richard Sun, founder and CEO of alphaAI. “We believe investing should be smart, responsive, and easy. Our AI takes care of the heavy lifting, so our users can focus on their goals while we handle market changes.”

‍

A Smarter Way to Invest. Unlike traditional robo-advisors that only focus on portfolio construction, alphaAI goes further by also automating risk management and real-time portfolio adjustments. With alphaAI, investors can rest easy knowing their portfolios are optimized for every market environment — whether it’s an aggressive stance during strong markets or a defensive posture during volatile periods. 

‍

Join the Public Beta Today. alphaAI invites all progressive investors who believe in the future of AI-driven finance to join the public beta. Users can try the platform for free and experience a smarter, more responsive way to invest. To celebrate the launch, alphaAI is offering a one-week free trial plus an exclusive 44% discount on a six-month subscription.

‍

For more information, visit www.alphaai.capital today.

‍

About alphaAI:

alphaAI is an innovative AI-driven investment platform that automates portfolio management by dynamically adjusting to market conditions. Founded by former Wall Street hedge fund analyst Richard Sun, alphaAI’s mission is to make sophisticated investment strategies accessible to everyone. With industry-leading technology and data-driven processes, alphaAI provides investors with a smarter, more responsive investment experience.

‍

Media Contact:

Email: media@alphaai.capital

Website: www.alphaai.capital

Using Quiver Quantitative’s Fear and Greed Index to Manage Leveraged ETF Volatility For More Successful Investment Outcomes

A Study by alphaAI

Richard Sun

May 22, 2024

‍

Intro to Leveraged ETFs

Leveraged exchange-traded funds (ETFs) have long been in the portfolios of risk-tolerant investors seeking magnified gains. Leveraged ETFs typically use financial derivatives and debt to amplify the returns of an underlying index. While a traditional ETF seeks to track its underlying index on a 1:1 basis, a leveraged ETF may aim to track at a 2:1 or 3:1 ratio ¹. This means that if the underlying index returns 1% over some period of time, the corresponding 3:1 leveraged ETF will return roughly 3% over the same period of time. Some variances will occur, and leveraged ETFs are also subject to volatility drag ², but these are topics that will be covered in a separate study.

‍

For the remainder of this study, the leveraged ETF we will specifically refer to is TQQQ. TQQQ is the ProShares UltraPro QQQ ETF and seeks daily investment results, before fees and expenses, that correspond to three times the daily performance of the Nasdaq-100 Index ³. TQQQ is one of the most popular leveraged ETFs on the market, with assets under management (AUM) in excess of $22 billion and an average one-month trading volume in excess of $60 million ⁴. Since the ETF’s inception in 2010, it has returned an average of 42.7% annually. In the last year alone, TQQQ returned 121.3%, compared with its underlying index, the Nasdaq-100, which returned 39.6% in the same time period (data as of 3/31/24) ⁵.

‍

‍

Volatility as a Measure of Risk

The primary challenge with TQQQ, and leveraged ETFs in general, is their extremely high volatility. This volatility, in turn, can lead to amplified losses. Since TQQQ aims to track the Nasdaq-100 at a 3:1 ratio, both gains and losses are magnified by roughly three times, with losses often being more pronounced due to volatility drag.

‍

To quantify this problem, we will use volatility, a statistical measure of the dispersion of returns for a given security, fund, or investment strategy ⁶. Volatility is often measured as the annualized standard deviation of returns of the security in question, which is, in this case, TQQQ. You calculate volatility by finding the standard deviation of the returns and then adjusting it by the square root of the time horizon. For example, if you had the daily returns of an ETF in Excel, you would first calculate the standard deviation of those returns with the STDEV function. Next, you would multiply the result by sqrt(252) to get the ETF’s annualized volatility. We use 252 because there are 252 trading days in a year ⁷.

‍

The Nasdaq-100 has an average annual volatility of roughly 28% (calculated based on daily returns since December 1998). In a normal distribution, 68% of the data falls within one standard deviation of the mean, and 95% of the data falls within two standard deviations of the mean. Although security returns are not necessarily normally distributed (a topic for a different study), this is the framework we will use to interpret volatility. So if you invested $1,000 in the Nasdaq-100, a volatility of 28% means that there is a 68% chance your portfolio value after one year will be within $720 and $1,280 and a 95% chance it will be within $440 and $1,560. The bottom line is that higher volatility is associated with a higher potential for gain but also a higher potential for loss. For reference, the S&P 500, the most widely used benchmark for the market, has an average annual volatility of roughly 17% (calculated based on daily returns since January 1990). Investors with a lower risk tolerance typically target portfolio volatility below 17%, while those with a higher risk tolerance typically seek volatility in excess of 17%. The best-performing investment strategies aim to deliver returns above the level of volatility taken on. One way of quantifying risk-adjusted return is through the Sharpe Ratio, which we will take a look at later on ⁸. Another metric we will discuss later is alpha, or an investment strategy’s ability to beat its benchmark ⁹.

‍

The Problem with Leveraged ETFs

We have already established that the most significant problem with TQQQ is its high volatility. Since its inception, TQQQ has had an average annual volatility of roughly 61%. This means there is a 68% chance you could see returns between -61% and +61% in any given year. With higher volatility comes higher drawdowns, too. For example, in 2022, TQQQ lost nearly 80%. In an exceptionally bad year, TQQQ investors could stand to lose nearly 100% of their investment due to magnified losses combined with the daily rebalancing mechanics of leveraged ETFs and volatility drag. 

‍

‍

This level of risk is simply not feasible for investors, nor is it recommended by alphaAI under any circumstance. So, the question remains: How can investors effectively take advantage of the magnified return characteristics of leveraged ETFs while controlling volatility and drawdowns? In the next section, we will introduce alphaAI’s approach to volatility management.

‍

How alphaAI Approaches Volatility Management

At alphaAI, our automated investment strategies are based primarily on exposure management. Exposure is defined as the percentage of your portfolio you have invested at any given time. For example, an exposure of 50% would indicate that 50% of your portfolio is invested and 50% is held in cash. Exposure management is an extremely effective way to manage volatility since the less exposed an investor is, the lower that investor’s volatility will be. The idea behind exposure management is simple: We want more exposure when market conditions are favorable and less exposure when conditions are weak. However, the execution is the most difficult aspect. 

‍

We solved this problem by developing proprietary signals that we use to manage exposure. If you are unfamiliar with our AI system and the machine-learning (ML) techniques we used to build it, I recommend checking out our technology overview and our two-part series on ML for stock trading. At a high level, our AI system consists of multiple predictive models that are trained on multiple decades of data for over 10,000 global stocks. On average, each model is trained on more than 10 billion data points. Each model is trained to perform a unique predictive capability, and multiple models work together to make trading decisions ¹⁰. Our models work together to generate signals that quantify the level of risk in the market, and we use those signals to manage exposure in an automated and systematic way. Our system will be discussed in more depth in future studies.

‍

As time passes, the market continues to generate data and correlations that have never been present before. This is why it’s impossible for a single signal to be effective 100% of the time. Thus, we recommend that our clients diversify their portfolios by running investment strategies based on multiple different signals. The probability of successful and consistent investment outcomes greatly increases when multiple signals are used together, as they cover each other’s weaknesses ^{11, 12}. Our default strategy at the time of writing is based on the signals of over 100 different models, which greatly contributes to how we’ve produced market-beating results since our inception. 

‍

Thus, we continually develop and search for new signals to aid us. One signal that we’ve found particularly effective is Quiver Quantitative’s Fear and Greed Index.

‍

Intro to Quiver Quantitative and the Fear and Greed Index

Quiver Quantitative is an alternative data provider catered to retail traders. Quiver aims to close the gap between institutional and retail traders by scraping alternative stock data from across the internet and aggregating it in a free, easy-to-use web dashboard ¹³. Access to more data enables retail traders to make more informed and, thus, better investment decisions. Some of Quiver’s most popular datasets cover trades made by members of Congress and company insiders.

‍

Quiver’s Fear and Greed Index (F&G) tracks the relative bullishness or bearishness of discussion on the WallStreetBets forum. WallStreetBets is one of the largest investment-related subreddits, where participants discuss stock and options trading. It became notable for playing a major role in the 2021 GameStop short squeeze that caused major losses to some institutional funds and short sellers ¹⁴. F&G is created by using natural language processing (NLP) to gauge the sentiment on the WallStreetBets forum. F&G is quantified as a number between 0 and 100, with 100 indicating the maximum level of bullishness, 0 indicating the maximum level of bearishness, and 50 being the midpoint. The data history begins in August 2018 and extends to the present. A new value is generated daily based on the previous day’s data, i.e., the data is one day lagged ¹⁵.

‍

‍

Using Quiver Quantitative’s Fear and Greed Index to Manage Volatility

We hypothesize that using F&G to manage an investment strategy’s exposure level to TQQQ will yield a greater risk-adjusted return than a passive approach. Our analysis period will be from January 1, 2019, to April 29, 2024. We will compare the performance results of our risk-managed investment strategy using F&G (F&G Strategy) with a buy-and-hold approach of TQQQ (TQQQ Strategy) as well as a buy-and-hold approach of the S&P 500 (SPX Strategy). 

‍

Let’s first establish some baseline metrics. The TQQQ Strategy and the SPX Strategy yield the following results over the test time period:

‍

‍

As expected, the TQQQ Strategy yields a higher overall return than the SPX Strategy, but the volatility level of 66% corresponds to an unacceptable level of risk. Even more alarming is that the TQQQ Strategy experienced a 79% drawdown in 2022, rendering this strategy unfeasible for virtually all investors, regardless of their risk tolerance. For the level of risk taken, the TQQQ Strategy does not beat the SPX Strategy since the Sharpe Ratios for both strategies are the same (you can roughly think of the Sharpe Ratio as the return adjusted by the volatility). 

‍

Now, let’s describe the F&G Strategy. Our goal is to create a strategy that actively manages exposure to TQQQ in an automated and systematic way. We are targeting a portfolio volatility level of 30%, which roughly matches that of the Nasdaq-100 and is also the maximum level we are personally willing to accept as investors. To accomplish this, we propose a binary risk-on/risk-off approach that only trades TQQQ. When the value of F&G is 50 or greater (indicating relative bullishness), the strategy will be in its risk-on state, and exposure to TQQQ will be 70% of the portfolio’s value. When the value of F&G is below 50 (indicating relative bearishness), the strategy will be in its risk-off state, and exposure to TQQQ will be 20% of the portfolio’s value. The excess portfolio value will be held in cash and can be invested in a high-yielding money market or treasury fund to provide steady dividend income and further boost returns (this aspect will not be discussed in this paper).

‍

When we run this strategy, we see a significant improvement in the investment outcome when compared to a passive approach:

‍

‍

Compared to the SPX Strategy, the F&G Strategy delivered greater overall returns and, more importantly, greater risk-adjusted returns, as illustrated by a Sharpe Ratio that is more than 60% better. Even more impressive is the F&G Strategy’s staggering 13.6% of alpha generated, indicating that the actions taken by our automated risk management system significantly contributed to our strategy’s outperformance over a buy-and-hold approach. Compared to the TQQQ Strategy, the volatility of the F&G Strategy was significantly lower and stayed below our target 30% range. More importantly, the drawdown in 2022 was reduced by more than half, from 79% to 34%, which is within our acceptable range. The bottom line is that using the F&G Index as a signal to manage risk resulted in a significantly better risk-adjusted return over a passive, buy-and-hold approach.

‍

Below are some additional charts for your reference:

‍

‍

‍

Conclusion

We conclude that using the F&G Index as a signal to manage risk resulted in a significantly better risk-adjusted return over a passive, buy-and-hold approach. Compared to the TQQQ Strategy, which was unfeasible due to its extremely high level of volatility and drawdowns, the F&G Strategy was viable and brought volatility and drawdowns into a controllable and expected range. Compared to the SPX Strategy, the F&G Strategy yielded significantly greater risk-adjusted returns and generated positive alpha. 

‍

It’s important to note that you, as an investor, will likely have a different level of risk tolerance. The parameters of the F&G Strategy, such as TQQQ exposure, can be adjusted so that volatility and drawdowns match your expectations, which is exactly what alphaAI helps you do in an automated way.

‍

As previously discussed, as time passes, the market continues to generate data and correlations that have never been present before. This is why it’s impossible for a single signal to be effective 100% of the time. Thus, we recommend that our clients diversify their portfolios by running investment strategies based on multiple different signals. We recommend running a version of the F&G Strategy in addition to the other strategies offered by alphaAI. As of the time of writing, alphaAI’s default strategy is based on the signals of over 100 different models. Diversification of a portfolio’s strategies to multiple signals, including F&G, leads to improved investment outcomes over the long run. 

‍

If the types of investment systems described in this paper appeal to you, please consider checking out alphaAI and Quiver Quantitative. Don’t hesitate to reach out if you have any questions or feedback: support@alphaai.capital

‍

References

1. https://www.investopedia.com/terms/l/leveraged-etf.asp
2. https://www.etf.com/sections/etf-basics/why-do-leveraged-etfs-decay
3. https://www.proshares.com/our-etfs/leveraged-and-inverse/tqqq
4. https://etfdb.com/etf/TQQQ/#etf-ticker-profile
5. https://www.proshares.com/globalassets/proshares/fact-sheet/prosharesfactsheettqqq.pdf
6. https://www.investopedia.com/terms/v/volatility.asp
7. https://www.alphaai.capital/journal-entries/volatility-standard-deviation-why-should-you-care
8. https://www.alphaai.capital/journal-entries/sharpe-ratio-risk-adjusted-returns-tell-a-different-story-than-absolute-returns
9. https://www.alphaai.capital/journal-entries/alpha-the-holy-grail-of-investing
10. https://www.alphaai.capital/journal-entries/our-technology
11. https://www.neuravest.net/the-benefits-of-a-multi-strategy-investment-approach-2/
12. https://www.investopedia.com/articles/trading/09/quant-strategies.asp
13. https://www.quiverquant.com/aboutus/
14. https://en.wikipedia.org/wiki/R/wallstreetbets
15. https://www.quiverquant.com/fearandgreed/

‍

The Santa Claus Rally, a term coined in the early 1970s by Yale Hirsch of the Stock Trader's Almanac, refers to the typically observed rise in stock prices during the last week of December and the first few trading days of January. This intriguing phenomenon has garnered significant attention from investors and economists due to its historical significance and the intriguing patterns it presents.

‍

Historical Context of the Santa Claus Rally

‍

The concept of the Santa Claus Rally has intrigued investors and market analysts for decades. First identified and named in the early 1970s by Yale Hirsch, the creator of the Stock Trader's Almanac, this phenomenon refers to a tendency for stock markets, particularly major indices like the S&P 500, to experience gains during the last week of December through the first few trading days of January. This period, often characterized by festive cheer and holiday spirit, has consistently shown a notable, albeit short-lived, positive impact on the stock market.

‍

Historical data since 1950 reveals that the S&P 500 has, on average, gained about 1.3% during this brief rally period. This increase is significant, especially considering the rally's limited duration, typically encompassing just over a week of trading. This pattern suggests that the rally is not merely a random occurrence but a recurring trend that has captured the attention of the financial world.

‍

Observations and Consistency Over Time

‍

The Santa Claus Rally is not an isolated or irregular event but has shown remarkable consistency over time. In the last 27 years, the phenomenon has occurred approximately 67% of the time, reinforcing the notion that this rally is a reliable seasonal trend in the stock market. Such a pattern is particularly striking given the various economic cycles and market fluctuations experienced over these decades, including periods of recession, market booms, and technological advancements that have transformed trading practices.

‍

The rally's consistent occurrence raises questions about its underlying causes. Some speculate that the trend could be attributed to factors like year-end bonus investing, reduced trading volume due to the holiday season, and tax-related portfolio adjustments. Others suggest that general market optimism during the holiday season could contribute to this trend. While the exact reasons remain a subject of debate, the historical data underscores the Santa Claus Rally as a notable and recurring feature in the stock market's seasonal behavior.

‍

The Digital Age and Globalization

Changing Dynamics in the Era of Online Trading

‍

The Digital Age has significantly influenced the dynamics of the Santa Claus Rally. With the advent of online trading platforms, there has been a democratization of stock market access, allowing a more diverse range of investors to participate in trading activities. This shift has led to a change in the way traditional market patterns, including the Santa Claus Rally, manifest. The ease of trading, coupled with instantaneous access to financial data and news, has enabled traders around the world to react quickly to market trends and global events. As a result, the once-predictable patterns of the Santa Claus Rally may now be influenced by a wider array of factors, potentially diminishing its consistency and impact.

‍

Globalization and Its Impact

‍

Furthermore, globalization has interconnected financial markets like never before. Events in one part of the world can have immediate and significant repercussions in others, leading to a more synchronized global market reaction. This interconnectedness means that traditional seasonal market trends, such as the Santa Claus Rally, could be altered or overshadowed by international economic, political, or social events. As investors from different parts of the world bring their own perspectives and reactions to global developments, the collective impact on the stock market during the holiday season might display new characteristics or diverge from historical patterns.

Statistical Analysis of the Santa Claus Rally

Insights from Historical Data

‍

A detailed examination of historical data on the Santa Claus Rally provides valuable insights into this phenomenon. Statistically, certain years have demonstrated notably strong rallies, particularly during periods of economic recovery or post-crisis rebounds. For instance, the end of 2008 and the beginning of 2009 marked a period of significant recovery from the global financial crisis. During this time, major indices like the S&P 500 experienced robust rallies, reflecting the market’s response to broader economic recovery efforts and improved investor sentiment. Such instances underscore the influence of macroeconomic conditions on the magnitude and occurrence of the Santa Claus Rally.

‍

Variability and Economic Conditions

‍

The variability in the strength and occurrence of the Santa Claus Rally across different years highlights the influence of broader economic conditions on this trend. While the rally has been a recurring phenomenon, its intensity can vary greatly depending on the prevailing economic environment. For example, during years of economic prosperity or recovery, the rally tends to be more pronounced, while in years of economic downturn or uncertainty, its impact may be muted or less consistent. This variability suggests that while the Santa Claus Rally has historical precedence, it is not immune to the effects of larger economic and market forces, making it an interesting but complex pattern to analyze for investors and market strategists.

‍

Global Perspectives on the Santa Claus Rally

International Occurrence

‍

The Santa Claus Rally is a phenomenon that extends beyond the borders of the United States, with similar trends observed in various global markets. This consistency across different countries and economic environments suggests that the rally might be driven by a common psychological effect associated with the holiday season. This worldwide occurrence underlines the universality of certain investor behaviors and sentiments, transcending cultural and geographical boundaries.

‍

Interconnectivity of Markets

‍

These observations are crucial in understanding the interconnectivity and interdependence of global financial markets. The shared investor sentiment during the holiday season can lead to similar market behaviors across different countries, reinforcing the idea that stock markets are not just influenced by local factors but also by global investor psychology and trends. This global perspective on the Santa Claus Rally highlights the importance of considering international market dynamics when analyzing seasonal trends.

‍

Critiques and Counterarguments

The Self-Fulfilling Prophecy Argument

‍

Some market analysts and experts view the Santa Claus Rally as more of a self-fulfilling prophecy than a phenomenon grounded in fundamental market analysis. They argue that the expectation of a rally itself may drive investor behavior, leading to increased buying and thus artificially inflating stock prices during this period. This perspective suggests that the rally may be driven more by collective investor psychology and expectations rather than concrete economic or financial factors.

‍

Comparisons with Other Market Periods

‍

Other critics of the Santa Claus Rally point to analyses showing that the market's performance during this period is not significantly different from other times of the year when adjusted for factors like volatility and other market conditions. They contend that the perceived rally may simply be part of the market's normal fluctuations and not a distinct or reliable trend. This argument underscores the importance of comprehensive market analysis and cautions against over-reliance on seasonal trends for investment strategies.

‍

Practical Implications for Investors

‍

For investors, the Santa Claus Rally presents both an opportunity and a caution. While historical data indicates a likelihood of market gains during this period, it is essential to consider this trend in the context of broader market dynamics and individual investment strategies. The rally, though consistent, should not be seen as a guaranteed annual occurrence and certainly not as the sole basis for investment decisions.

‍

Takeaways:

‍

The Santa Claus Rally is a fascinating example of how sentiment and psychology can influence financial markets. While it offers historical patterns of gains, investors should approach it with caution and consider it as one of many factors in a comprehensive investment strategy. In today's digitally-driven and globalized market, tools like alphaAI play a crucial role in helping investors navigate through these seasonal trends and beyond using the help of advanced technologies as well as tested strategies.

‍

For more in-depth historical data and analysis on the Santa Claus Rally, resources like Wikipedia​​, OpenMarkets by CME Group​​, Seeking Alpha​​, and Yahoo Finance​​​​ offer comprehensive insights and perspectives.

Welcome to our Friday Finance Fix Newsletter, where we bring you the latest updates on key financial developments shaping the economy and markets.

Nike's Strategic Cost-Cutting and Layoff Plans

‍

Nike, a renowned global sneaker brand, has announced significant strategic changes in its business model. In a move to streamline operations, the company plans to cut up to $2 billion in costs. This plan involves simplifying their product assortment and increasing automation. However, it comes with a significant human cost, as Nike has yet to specify the exact number of job cuts, which are expected to lead to restructuring charges estimated between $400 million and $450 million, primarily due to employee severance costs.

‍

Despite these changes, Nike's financial health appears robust. The company reported a 19% annual increase in net income, totaling $1.6 billion, and a revenue of $13.4 billion, which is slightly higher than the previous year. Additionally, Nike's gross margin has improved, ending a six-quarter decline.

‍

‍

Economic Growth and Rate Cut Speculations

‍

The U.S. economy showed slower growth last quarter than initially estimated, with the GDP growing at a 4.9% annualized rate. However, this slowdown brings a silver lining: the Federal Reserve is nearing its 2% target for inflation, leading to a pause in interest rate increases. The labor market remains resilient, with jobless claims slightly rising to 205,000, still near historic lows.

‍

‍

Coinbase: The Amazon of Crypto

‍

JMP Securities has given a strong endorsement to Coinbase, likening it to Amazon in its early days. They raised their price target for Coinbase to $200 from $107, reflecting a 19% upside potential. The optimism is partly due to Coinbase's positioning as a leader in the burgeoning digital asset economy. Coinbase's stock has seen a dramatic surge, closely tied to the evolving cryptocurrency landscape.

‍

The Santa Claus Rally Phenomenon

‍

As the year ends, the financial markets enter the Santa Claus rally period, historically associated with an average gain of 1.3% on the S&P 500. This phenomenon, recognized since 1950, often results in higher stock market returns during the last five trading days of one year and the first two of the next. The rationale behind this trend includes a mix of year-end optimism, new money inflows, and reduced institutional trading.

‍

‍

Consumer Spending Trends: Experiences over Presents

‍

The holiday spending trend in the U.S. is shifting, with consumers increasingly spending on experiences rather than physical gifts. This year, Americans are expected to spend nearly $1 trillion during the holiday season, with a notable increase in expenditure on dining, entertainment, and events, as reported by The Wall Street Journal. The National Retail Federation anticipates this year to mark the 15th consecutive year of increased holiday spending.

‍

‍

What about alphaAI?

‍

In any investment endeavor, the key to success lies in making informed decisions. Whether you're building a recession-resistant portfolio, diversifying your assets, or simply exploring new opportunities, your journey should be guided by knowledge and insight. At alphaAI, we are dedicated to helping you invest intelligently with AI-powered strategies. Our roboadvisor adapts to market shifts, offering dynamic wealth management tailored to your risk level and portfolio preferences. We're your trusted partner in the complex world of finance, working with you to make smarter investments and pursue your financial goals with confidence. Your journey to financial success begins here, with alphaAI by your side.

The fintech landscape has undergone a dramatic transformation in recent years, largely driven by the advent and integration of Artificial Intelligence (AI). Once characterized by online banking and straightforward digital payment solutions, the sector is now at the forefront of technological innovation. AI's entry into this space marks a significant paradigm shift, transitioning from digital convenience to sophisticated, AI-enhanced financial operations. This section will explore how AI is not just augmenting but fundamentally changing how financial services operate, highlighting key historical shifts and the implications of AI integration for the future of finance.

‍

‍The Evolution of Fintech and AI

‍

Historical Perspective: From the early days of online banking to the current landscape dominated by mobile banking apps and digital wallets, fintech has continuously evolved. The introduction of AI represented a quantum leap, enabling complex decision-making processes and sophisticated data analysis.

‍

Statistical Analysis: The Global Fintech Report reveals that 65% of traditional financial institutions increased their AI investments since 2015, with a significant surge observed post-2020. AI investment in fintech reached a milestone in 2022, surpassing $60 billion globally, indicating the sector's growing reliance on AI technologies.

‍

AI-Driven Innovations in Fintech

‍

RobaAdvisors: Roboadvisors, like alphaAI, manage money in assets, offering automated, personalized investment advice based on algorithmic strategies. The user-friendly platforms have democratized investment, making financial advice accessible to a broader audience.

‍

Fraud Detection and Security: AI systems like IBM's Watson and Darktrace are revolutionizing fraud detection by analyzing transaction patterns and predicting fraudulent activity with greater accuracy than ever before.

‍

Algorithmic Trading: AI in algorithmic trading is transforming market dynamics, with systems capable of analyzing vast amounts of data to make split-second trading decisions, thus impacting the market's efficiency and liquidity.

‍

Predictive Analytics and Customer Insights

‍

In-Depth Case Studies: For example, American Express uses AI to scrutinize transaction data, enhancing fraud detection and customizing customer rewards. This approach has not only improved security but also customer engagement and loyalty.

‍

Customer Experience: Banks are utilizing AI to offer more personalized services. For instance, Bank of America's AI-driven virtual assistant, Erica, provides personalized financial guidance to millions of customers, enhancing user experience and financial management.

‍

The Role of Big Data in AI-Driven Fintech

‍

Data Sources and Management: Fintech companies are harnessing data from varied sources, including social media, IoT devices, and transaction histories, to feed their AI algorithms. The management of this data is crucial, requiring sophisticated data processing and storage solutions.

‍

Challenges and Solutions: While big data presents immense opportunities, it also raises significant privacy concerns. Advanced cryptographic techniques, such as homomorphic encryption, allow for the processing of encrypted data, ensuring privacy while utilizing AI.

‍

‍

Regulatory Landscape for AI in Fintech

‍

Global Perspective: Different regions are adopting varied approaches to AI in fintech. For example, the EU's GDPR focuses on data privacy, while the US's Dodd-Frank Act addresses financial stability and consumer protection.

‍

Future Regulatory Predictions: Experts predict an emergence of more cohesive international regulatory standards, focusing on ethical AI usage and data protection, to foster global fintech growth while mitigating risks.

‍

Investment Trends in AI-Driven Fintech

‍

Venture Capital Analysis: The investment landscape for AI-driven fintech has evolved, with a notable shift towards early-stage startups. In 2023, early-stage investments constituted over 40% of all fintech AI funding.

‍

Impact of COVID-19: The pandemic accelerated digital adoption in fintech, with a 70% increase in the use of digital banking services, thereby fueling more investments in AI to cater to the growing demand for digital financial solutions.

‍

Case Studies: Success Stories and Failures

‍

Success Stories: Ant Financial's use of AI in providing micro-loans and insurance has not only been profitable but also instrumental in financial inclusion in underserved markets.

‍

Learning from Failures: Lendy's failure highlights the importance of scalable AI solutions and the need for compliance with evolving regulatory standards.

‍

Future Predictions and Trends

Emerging Technologies: The intersection of AI with emerging technologies like blockchain and quantum computing is expected to further revolutionize fintech, offering more secure and efficient financial transactions.

‍

The Role of Ethics and Social Responsibility

‍

Ethical AI Development: The development of AI in fintech must adhere to ethical standards, focusing on transparency, accountability, and fairness to maintain consumer trust and market integrity.

‍

Sustainable Investing and ESG: AI is increasingly being used to analyze ESG data, aiding in the promotion of sustainable investing and responsible financial decision-making.

‍

Takeaways

The synergy between AI, data analytics, and financial services is creating a new era in fintech. This convergence is expected to continue, leading to more innovative, efficient, and accessible financial products and services. Not to mention, unmatched technologies which help individual investors navigate downturns effectively. Want to learn more about the ever-changing blend of AI and finance? Learn more at our site.

Welcome to our Friday Finance Fix Newsletter, where we bring you the latest updates on key financial developments shaping the economy and markets.

The Market Rips After Fed Chair Powell Speech

‍

The Dow Jones Industrial Average hit a record peak this week, propelled by Federal Reserve Chair Jerome Powell's year-end address. The central bank held interest rates steady at 5.25-5.5%, with hints of potential rate cuts in 2024. This signal, coupled with recent data indicating a slowdown in inflation, fueled optimism among investors, leading to a surge across all major indices. The Dow's year-to-date gain now impressively stands at 11.9%, outpacing broader market advances. Powell's cautious tone throughout the speech, focusing on achieving the 2% inflation target, suggests a carefully navigated path ahead.

‍

‍

The UAW Strike is Over and the Firings Begin

‍

The United Auto Workers (UAW) strike against the big three auto manufacturers brought significant contract improvements. However, the financial repercussions are now emerging. GM announced 1,313 layoffs amid production cuts, while Stellantis plans to let go of 3,680 workers, partly blaming California's vehicle sales laws. Ford, though currently not initiating layoffs, is halving its EV production, hinting at potential job cuts. These layoffs are part of a broader trend, highlighted by Etsy reducing its workforce by 11%, underlining the financial strains of the strike and a dampened demand for EVs.

‍

“Israel is Losing Support” According to Biden

‍

In a significant deviation from his typically cautious diplomatic stance, President Biden openly urged Israeli Prime Minister Netanyahu to reconsider his approach to Gaza. Biden emphasized the necessity of involving the Palestinian Authority for a long-term solution, cautioning that Israel's current policy risks diminishing international support. Netanyahu stood firm against Hamas, highlighting his commitment to countering their influence in Gaza. The dialogue reflects a growing global concern over the conflict's direction and underlines the urgency of finding a sustainable peace path. National Security Advisor Sullivan echoed these sentiments, advocating for a two-state solution, a position Netanyahu currently opposes.

‍

‍

Warren Buffet Has His Eye on Occidental Petroleum Corp

‍

Investment magnate Warren Buffet, through Berkshire Hathaway, has once again invested heavily in Occidental Petroleum Corp (OXY), acquiring a significant portion of the company. This move follows Occidental Petroleum's announcement of the $12 billion CrownRock acquisition, aimed at boosting oil and gas production. Buffet's investment has stirred the market, reflecting a broader trend of major oil companies consolidating resources, as seen with Exxon Mobil and Chevron's recent acquisitions. This development positions OXY as a formidable player in the oil and gas sector.

‍

‍

Google's App Store Monopoly Crumbles as Epic Wins a Victory

‍

In a landmark decision, a jury found Google's app store practices, particularly its mandatory use of Google Play billing, illegal. This verdict, stemming from Epic Games' three-year legal battle, is hailed as a victory for app developers and consumers alike. It challenges Google's app store monopoly, potentially abolishing the 15-30% fees on app purchases, which could save developers an estimated $12 billion annually. While Google plans to contest the verdict, this ruling could significantly reshape the app store landscape across the Android platform.

‍

‍

What about alphaAI?

‍

In any investment endeavor, the key to success lies in making informed decisions. Whether you're building a recession-resistant portfolio, diversifying your assets, or simply exploring new opportunities, your journey should be guided by knowledge and insight. At alphaAI, we are dedicated to helping you invest intelligently with AI-powered strategies. Our roboadvisor adapts to market shifts, offering dynamic wealth management tailored to your risk level and portfolio preferences. We're your trusted partner in the complex world of finance, working with you to make smarter investments and pursue your financial goals with confidence. Your journey to financial success begins here, with alphaAI by your side.