AI Equity Research: Opportunity, meet Preparation

AI Equity Research: Opportunity, meet Preparation

The S&P 500 is down 14% year to date, up a little after it had briefly flirted with bear market territory in May. The fact that the market (outside NASDAQ) is not in the grip of a bear as yet, can be attributed to the retail traders’ courage, or maybe temerity

Is now a good time to buy the dip in stocks? 

This year’s market declines have boosted individual investors’ favorite trade: buying the dip, or BTD. 

However, 2022 is shaping up to be one of the worst years for indiscriminate averaging down, as the macroeconomic landscape isn’t too bright. The inflation is at a 40-year high, and the Fed has begun an aggressive monetary tightening cycle, hiking rates by the most since 2000 and promising that more is to come. That has led to worries about a recession, which doesn’t bode well for stock markets: the average market dropdown in recessionary periods is 36%. 

Unlike the flash-crash of early 2020, investors are now weathering a more prolonged selloff that could worsen as recession risks grow, and the strategy of buying stocks for the sole reason that they are now cheaper than last year, can compound losses. As usual in turbulent times, the investment advice from different sources, well, differ a lot - and market data is all over the place. 

The prospect of downward revisions to earnings estimates hasn’t yet sunk in with the retail traders, and when the markets sniff the coming recession and begin sliding in earnest, they will be burned. Of course, there’s no trading signals that may help to time the markets - the only way to survive is using fundamentals-based trading strategies.

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Not all stocks are created equal

Many traders began their active stock market “careers” during lockdowns of 2020, and the only bear market they have ever encountered was the shortest one in history - remember that three weeks in March? That experience has shaped the retail investors’ “buy the dip” mentality. Traders look at the price and (maybe) some technical analysis - and make vital decisions based on lacking data. The net aggregate retail purchases of US securities by retail investors remains strong, hovering near the historical all-time-highs of Jan ’21 - even though they are already sitting on heavy losses, with the average retail portfolio drawdown just surpassing the Covid sell-off - currently at -32%.  

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It’s true that every crisis brings opportunities, and that a downturn or even a bear market isn’t a reason to sell everything in panic - but an opportunity to buy great stocks at decent prices. The problem is that many retail investors don’t know how to find them, instead increasing their holdings of various ETFs, filled with low-quality stocks along with the good ones, or loading on the same names that led the bull market up until this year, because of the familiarity bias. 

Bear Market is possible, but there are opportunities in stocks

Amateurs who were used to buying in a market that went up every single day for the Covid-19 era, don’t really believe in bear markets, it seems - or that it could take years for the general indexes to return to their pre-bear levels. Traders believe in what the financial press has touted for years: stocks eventually go up; but they aren’t aware that “eventually” can take a few years. The 2008 bear market wasn’t the deepest, for example, but it took four years for the indexes to fully recover from the crash. And within the broad indexes there might be stocks that never recover - who knows, maybe they are the ones that are sitting in the traders’ portfolios, brought there by knowledge gaps or some biased “stock research”?

But prolonged wild swings in the market are beginning to test traders’ belief in the BTD strategy; some of them are backing away from stocks, wary that they could fall much further and that there may be a recession on the horizon. Online brokerages including Robinhood have already reported a slowdown in customer trading activity in recent weeks. The platform said that while larger customers are still remaining active, many others have become more cautious with their portfolios and are trading less frequently. As long as the turmoil continues, there will be more and more of these retail investors, licking their wounds outside of the stock markets. 

Search for quality, screen by fundamentals

It doesn’t have to be like this - individual traders can be educated to make their choices based on corporate financial statements, and only then on stock prices. That’s where Trading Platforms come into the picture, as they have skin in the game: traders’ profits are their success. Trading Platforms can help traders learn how to choose stocks wisely, using smart research tools for their fundamental analysis, such as AI-based stock analysis and AI equity research.   

Standing on the brink of a bear market, it’s more important than ever to filter out the noise. Instead of buying the mood of the markets, traders can learn to screen for quality: profitability, financial strength, and efficiency, plus decent sales growth and free-cash-flow yields.There are plenty of good trades to be found among companies with sturdy cash flows, healthy growth, and even decent dividends. Where ambitious growth pricing is taking hits, it's time to drill back into the fundamentals and extract the actual value, using AI-based equity research. Trading Platforms can supply their customers with data and tools to do exactly that - and also provide them knowledge to use these tools and to analyze the data. 

Judging by the VIX (CBOE Volatility Index), currently at around 25 and close to its long term average, the fact that we are riding small rallies on the way down, has yet to sink in - which means there’s still time to adjust trading portfolios according to companies’ financial strength and consequently their resilience in the face of adversity.


CBOE Volatility Index 20-year history

Outsource the market madness to AI

It’s true that not all retail traders can read fundamental reports even if they want to - beside the fact that these reports are not always available in time and in a language they understand. Should traders only invest in stocks that are checked and recommended by analysts? Should they abandon smaller companies or stocks from abroad that are not getting any significant analysis and news coverage, thus forsaking great opportunities of buying into inexpensive quality companies that are flying under the radar?

Not in the 21st century. Nowadays, there are technological solutions for many problems, including fundamental analysis. Trading Platforms can provide AI-based fundamental analysis and stock screening tools with results on most public companies around the globe, in traders’ native languages (no need to learn Portuguese or Mandarin - there’s a “robot mind” to translate for you). Let Artificial Intelligence do the hard work of performing automated due diligence on the latest financial data and breaking down a stock's strengths and weaknesses in simple short explanations, while traders enjoy the results in their bottom lines - and so do Trading Platforms, as user engagement increases back to the good old 2021 levels.


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