A view on the SP500 based on the Manufacturing ISM using Artificial Intelligence

1. Page 1
SP500 Quantamental Insights
Artificial Intelligence at the Service of Asset Managers and Decision Makers
By EyeHigh
04th May 2020
SP500 VIEWED THROUGH Ai LENSES
Take a look to Charts 1 & 2. What
you see are two alternative
hypotheses of events yet to come.
Although the exact path is
unknown to us, our idea is to use
those scenarios as basic building
blocks. A proper generalization
will make possible to extract
forward looking conclusions.
Both theoretical developments
depict a deep ISM contraction.
What is relevant is how long it
takes for the ISM to get back and
above 50 as of the Mar20 reading
(7 and 10 months, respectively).
You think that is too long?
Compare that against the 12m it
took in 2008 or 19m during the
first wave in 2000. Note that at
ISM~50 we assume the Fed will
start raising rates and that both
paths stabilize around 54.
Given this set of conditions, what
would be reasonable to expect for
equities (SP500)? What are the
essential clues going forward?
Generalizing this problem as we
stated it was not as trivial as you
might think. Just to provide you a
grasp of it, think that while we
show here raw data, algorithms
require preprocessed data and
that means a big difference.
We are not interested in the
forecasts per se, meaning the
quantities. We look at the shape,
timing and relative size of the
output. That is what is presented
in Charts 3 & 4 for experts A & B.
An Ai Compass…
…for Equities
You, captain of an
investment “vessel”, are
navigating unchartered
waters. An unexpected
shock has led to an
unprecedented economic
contraction. Authorities have
resolved huge fiscal and
monetary stimulus.
Your “map” contains some
reference points (ie monthly
macro data), but they are
either outliers, or you deem
them insufficient to position
yourself in the economic
cycle.
What should you do about
equities? How can you set
up a reasonable compass?
Where is North?
First choose a broad index,
SP500 will do. Now insert
that into a representation of
the economic cycle. That
would be the ISM
Manufacturing business
survey and the Fed rates.
Expectations are what glue
all three of them together.
Now we are ready to set sail.
With the help of the
generalizing nonlinear
capabilities of Ai algorithms
we will put all the pieces
together. We will use two
algorithms that we name A
and B. End of sample: Oct17

2. Page 2
SP500 Quantamental Insights
Artificial Intelligence at the Service of Asset Managers and Decision Makers
By EyeHigh
SP500 VIEWED THROUGH Ai LENSES
These are the main takeaways:
1) A & B do not think the same!! A
is more optimistic, but as we said
before we will focus on relative
size of forecasted returns.
2) The longer it takes the ISM to
get above 50, the more the
downside risk.
3) The market will resume its
upward trend way before the ISM
reaches 50. And it is not
proportional. In Path2 it takes 3
more months for the ISM to reach
50, but it only translates into 1
additional month of downside risk.
4) Our expert’s opinions part ways
once ISM = 50. This provides
reassurance for the first few
periods but implies more
uncertainty there on.
5) Despite that higher degree of
uncertainty, downside risk
diminishes dramatically once ISM
gets above 50.
6) The SP500 might not return to
march’s lows, but still there is
scope for more corrections.
7) Corrections in Path2 are
subsequently recovered faster
later. If you are short and you wait
for ISM improvements to get long
you will be increasingly pressed
for time. This signals a potential
upwards move a bit by surprise
while chaos stills prevails in data.
8) Once above 50, a stagnant ISM
entails a weakening SP500 trend.
9) Our designed path for Fed
interest rate increases are have a
neutral or positive (ie not
negative) effect in the SP500.
MACRO SCENARIO
But how credible is any of
our ISM future
alternatives? The current
macro environment has not
been caused by the
COVID19, but by human
decisions.
We have full knowledge of
the underlying macro
factor, but no way to play
it. We do not know what
politicians are thinking.
Their reaction functions are
a mystery to us.
We will ask this question to
our expert. Given the
current macro information
available, what would be
the predominant force in
the ISM for the coming
months?
Chart 5 shows that there is
underlying negative
strength (<0.5) for the ISM
for at least 4 more months.
Brace for Path1 but remain
open to Path2. This implies
we have not seen the ISM
low yet. Also, a clear
upward trend will take time
to settle and will probably
not be a straight line.
An unexpected tweet, drug,
vaccine or political decision
may render our forecast
useless. All of these are in
fact upside risks.
MORE
DOWNSIDE
RISK

3. DISCLAIMER:
This document does not constitute an offer or a solicitation to engage in any trading strategy or to purchase or sell any financial instruments. Given its
general nature, the information included in this document does not contain all the elements that may be relevant for a recipient to make an informed
decision in relation to any strategies or financial instruments discussed herein. The information and opinions contained in this document have been
obtained from sources believed to be reliable, but we make no representation, express or implied, that such information and opinions are accurate or
complete. Other financial institutions or persons may have different opinions or draw different conclusions from the same facts or ideas analyzed in
this document. Any scenarios, assumptions, historical or simulated performances, indicative prices or examples of potential transactions or returns are
included for illustrative purposes only, and we give no assurance that any favorable scenarios described are likely to happen, nor that it is possible to
trade on the terms described herein or that any of the potential returns illustrated can be achieved.
We have used historical information in order to provide an illustration of how certain parameters may have performed over a defined period. This
document also contains certain performance data based on back-testing, i.e., calculations of the hypothetical performance of a strategy, index or asset
as if it had actually existed during a defined period of time and may in certain circumstances contain simulated performance information where the
index or asset described has recently been established or issued.
The scenarios, simulations, development expectations and forecasts contained in this document are for illustrative purposes only. This type of
information has inherent limitations which you must consider carefully. While the information has been prepared in good faith in accordance with our
own internal models and other relevant sources, an analysis based on different models or assumptions may yield different results. Therefore, this
analysis may vary significantly from an analysis obtained from other sources or market participants. Further, please note that such analysis is based on
a number of working assumptions that may not be capable of duplication in actual trading terms. Unlike actual performance records, hypothetical or
simulated performances, returns or scenarios may not necessarily reflect certain market factors such as liquidity constraints, fees and transaction costs.
Actual historical or backtested past performance does not constitute an indication of future results.
In providing this document, we give no financial, legal, tax or any other type of advice to recipients. Certain strategies and/or potential transactions
discussed in this document involve the use of derivatives, which may be complex in nature and may give rise to substantial risk, including the risk of
partial or total loss of any investment. We make no representation as to whether any of the strategies discussed herein may be suitable for investors’
financial needs, circumstances or requirements. Investors must make their own assessment of the strategies and/or potential transactions, using such
professional advisors as they make require. We accept no liability for any direct or consequential losses arising from any action taken in connection
with the information contained in this document.