October 30-November 3, 2023

Tactical Signal 9

Sowell’s technical indicators exhibited a degree of softening in response to last week’s correction. However, at present, they are holding in full position, absorbing the wave of uncertainty, in anticipation that it will subside, subject to the Fed’s actions.

With the impending FOMC meeting on November 1, anticipation was rife as concerns about rising interest rates were heightened, driven by robust corporate earnings and a surging economy—a scenario where good news paradoxically spells trouble in the eyes of the Federal Reserve. The S&P 500, emblematic of market sentiment, navigated a rather tumultuous week, culminating in a 2.52% slide, pushing year-to-date gains below the 10% threshold to rest at 8.66%. In parallel, the Nasdaq composite also narrowed its year-to-date gains to 21.59%. The ever-looming specter of inflation and the persistent Israel-Gaza conflict cast their shadows, fostering volatility in the bond market. As a result, bond yields underwent a pronounced narrowing, with the Bloomberg US Aggregate Bond Index clocking a notable 0.68% gain. These market dynamics contributed to a gradual reduction in year-to-date losses, now at -2.48%.

In this turbulent financial landscape, there were glimmers of hope in economic data. Retail sales exceeded expectations, registering a noteworthy 0.70% increase, while Durable Goods Orders surged by a substantial 4.7%, and Industrial Production experienced a modest uptick of 0.30%. These positive indicators coalesced into a remarkable 4.9% surge in the US Gross Domestic Product (GDP). The tech titans, including Microsoft, Alphabet, Meta, and Amazon, renowned for their influential presence in the stock market, unveiled earnings reports that, for the most part, outperformed market expectations. Nevertheless, the week saw these tech giants, save for Microsoft, falling short of investors' anticipations, leaving many disappointed.

Ladies and gentlemen, as we stand just two days and two months away from the close of the year 2023, it is evident that the rise in geopolitical uncertainties and the Federal Open Market Committee's (FOMC) unwavering caution on policy adjustments are exerting a palpable weight on market sentiment. It's crucial to acknowledge that while uncertainties ebb and flow, the broader economic and earnings landscape is undergoing a profound strengthening. In these times, rather than dwelling on the prospect of a correction, let us pivot our attention toward the robust and enduring foundations that underpin our economic landscape.

The week ahead promises to be a significant one, with the release of third-quarter earnings reports gaining momentum. However, it's impossible to escape the gravitational pull of the FOMC's highly anticipated interest rate decision on the heels of higher than PCE rising 0.40% last month, which is scheduled to take place this Wednesday. The collective gaze, ears, and, indeed, the digital thumbs of investors and observers across the nation will be firmly fixed on this tipping point moment.

"For years, AI has powered online experiences, ranging from search to social media, working behind the scenes to serve up recommendations for us or about us: From what we watch, to what websites we visit, to what we buy. That version of AI has become so second nature in our digital lives that we often don't even realize or recognize it. You could say we've been using AI on autopilot. 

And now, this next generation of AI, we're moving from autopilot to copilot. We're already starting to see what these new Copilots can unlock – for software developers; for business processes like sales, marketing, and customer service; and for millions of people synthesizing information in powerful new ways, through multi-turn, conversational search." 

– Microsoft CEO Satya Nadella, The Future of Work with AI, March 16, 2023

AI 101 – A Path of Applications

AI Graphic

Artificial Intelligence (AI) is a dynamic and multifaceted field that has captured the imagination of scientists and the public alike. At its core, AI is about enabling machines to mimic human intelligence. This includes the capacity to reason, solve problems, learn from data, understand language, and interpret the world. AI systems use algorithms and machine learning techniques to process data, make decisions, and adapt to new situations.

However, AI is not a single, uniform concept. It's a diverse and versatile realm with numerous applications. Think of Bard and ChatGPT, both products of OpenAI, which represent two different applications of AI. Bard excels at creative content generation. Its remarkable skill lies in crafting imaginative and coherent text based on prompts, making it a valuable tool for creative writing. In contrast, ChatGPT is specialized in natural language understanding and conversation. It can engage in text-based dialogues, answer questions, and provide information, making it a valuable tool for interactive communication.

In the contemporary landscape, AI is increasingly being employed across various domains of research and work, including supporting investment processes. Bard, with its creative prowess, can generate captivating reports and narratives related to investment strategies. This transforms complex financial data into engaging and accessible information for investors. Moreover, it aids in the creation of persuasive presentations and marketing materials, simplifying the communication of investment concepts to clients. Portfolio managers can also benefit from natural language models like ChatGPT, as It simplifies intricate data by generating text-based reports summarizing crucial performance metrics, risk assessments, and investment opportunities. The conversational capabilities of ChatGPT enhance client engagement and trust by simulating discussions and promptly addressing client inquiries.

Nowadays, in the portfolio management world, more quantitative strategies have been developed by AI models. Although this is still a controversial topic regarding whether AI models can capture and forecast the market trend, investors using pure quant strategies can train machine learning models and have AI do the rebalance precisely. Though traditional investors can hardly bet their lives on such pure quant models established by AI due to its black-boxy nature, AI can still serve in the process by handling historical data to run backtesting or what-if portfolios, which using AI models to generate a summary on facts rather than opinions or forecasts. It can also support decision-making by providing a tactical overlay on a fundamental portfolio, where AI collects the data and gives a macro suggestion by analyzing the tactical trend while the manager still takes control over the stock selection. Depending on how the investors want it to be, it may serve as simple as an automated tool, where it takes data from different sources, organizes and handles the outliers, does the calculation, and then outputs in a format that's clean and readable. All these allow investors to take advantage of the fast development of AI while not losing control of the strategy and portfolio, keeping the process as transparent as it should be.

Statistical precision doesn't always equal accuracy in an economic sense. When enjoying the precision and efficiency of AI in managing portfolios, we should always be aware and keep an eye on the rationality of the process. Artificial intelligence is never designed to replace that of humans but rather to support, optimize, and confirm decisions that humans made as a tool that we are free to utilize. 

Reports Oct 30-Nov 3
Select Indices as of Oct 27, 2023

Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.


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