By Jason Bodner
November 14, 2023
Does “AI” Really Stand for Aviary Intelligence?
We’re obsessed with AI these days. The notion that artificial intelligence can do anything as good, if not better, than we humans, has fascinating implications. The funny thing is that AI algorithms are often created by using associative learning. This is basically an extension of trial and error, the same approach used by pigeons to solve problems, as revealed in a study out of Ohio State University.
We found really strong evidence that the mechanisms guiding pigeon learning are remarkably similar to the same principles that guide modern machine learning and AI techniques…Our findings suggest that in the pigeon, nature may have found a way to make an incredibly efficient learner that has no ability to generalize or extrapolate like humans would.”
– Brandon Turner, Professor of Psychology, Ohio State University
So, if AI takes over, society might resemble flocks of what we usually consider to be dim-witted pigeons.
It just goes to show that if nothing else, human logic is flawed. We strive to find patterns to predict outcomes. The trouble is, we often assign patterns when none are there. It’s called Apophenia- the same phenomenon that led to mass acceptance of this “face” on Mars:
Now, when we stop to think of the stock market and its limitless potential of patterns and rules, it is understandable why so many investors get trapped in making decisions based on flawed logic or faulty interpretation of raw data. This is the primary reason I sought to remove all emotion from investment decision-making. It is hard enough trying to be completely objective, yet relying on a brain that sees patterns that are not really there, and then trains computers to think like pigeons… well, enough said.
The recent market volatility has bucked historical trends dating back to 1990, namely that October through December are the strongest months of the year. October this year was a poor performer. But there’s still hope for a rockin’ good fourth quarter, since November is off to an awesome start:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
NASDAQ has shot up an astonishing 6.24% for the month of November, as of this writing. In the first table (above), I highlighted the areas that led the market higher since October’s oversold washout. Notice they are growth areas: Discretionary, Tech, Industrials, and Communications. You can see semiconductors are up 10% in the first days of November. The Russell 1000 growth indexes are also up, as is the S&P 500 Growth index. If we look at the breakdown of new buying, it’s plain to see the money flowing into Tech:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This new buying has catapulted Technology back into the #1 leadership position on the Sector Ranks:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Energy saw some recent selling pressure, which indicates profit taking at the end of a bearish cycle. Energy was the only sector seemingly impervious to October’s intense selling. That said, nearly every other sector, with the exception of Health Care, saw selling vanish and even give way to new buying.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This is constructive action, folks.
To take things a step further, let’s add this sector action to the bigger picture. First, let’s look at unusual trading volumes. The amber bars below show unusually large trades, according to my algorithms. What I found fascinating is that volume spiked huge as the market rocketed from the depths (green). And as the rally cooled, volume sank away (red). That’s what we want: Big up volume, and low down volume! That sets the stage for some continued constructive price action.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
When we add this to a view of unusual buys and sells in stocks and ETFs, we see further positive indicators. Violent selling has subsided, nearly overnight – as if a switch were flipped on Halloween!
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
This clearly points to some liquidations in October. I can’t say for sure, but this has the fingerprints of forced selling. July’s peak gave way to a bumpy August and weak September. October should have historically firmed up, but it weakened. And perhaps, portfolio managers were given the indication that it was time to reduce risk. Maybe investors redeemed their capital, requiring liquidation of positions. We can’t know for certain, but this has all the earmarks, because selling stopped on the last day of the month!
Now, look what happened to the Big Money Index (BMI).
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Talk about an about-face. The BMI went squarely into oversold territory, then turned on a dime and has since risen from oversold along with the immense rally we just saw. I wanted to see what prior instances like this now looked like, so I grabbed all the days in which the BMI closed above oversold after being oversold. This is what I found: the forward 1, 3, 6, 9 and 12-month returns were positive for a vast majority of the time. Markets rose at least 73.9% of the time, and 82.6% of the time 12 months later.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Well, that’s certainly encouraging:
Now, if you want to know what is likely to lead us out of the bearishness, I already gave you a huge clue in the sector action above. My research firm MAPsignals undertook an awesome study that identified the best performing sectors after climbing out of oversold. If you guessed technology, you were right.
Here we can see how the sectors shook out (since 1996) after the BMI rose from oversold:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The average tech returns of the 23 oversold instances since 1996 are as follows:
This is exciting, because we are already seeing early evidence of tech leading us out of the depths. Naturally, what you also shouldn’t overlook is that all sectors were higher in those instances since 1996.
Now, there are visual patterns we can assign to markets. Things like technical pivot points, bearish engulfing patterns, flags, Fibonacci retracements, and countless other patterns. Then on the other side, there is cold hard historical data. When we study the past and aggregate them for a forward prediction, it’s much more like associative learning. We are essentially doing trial and error.
This is the logic of AI… and ironically, it’s also the logic of pigeons. In either case, the news looks pretty good. We never know for sure, but if we can use proper logic to guide our decision making as investors, we can hope to avoid the pitfalls of assigning false patterns and trading on instinct.
Remember to stay humble. You could be replaced by a pigeon: “The learning principles that guide the behaviors of these AI machines are pretty similar to what pigeons use.” – Brandon Turner, Ohio State U.
All content above represents the opinion of Jason Bodner of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Two Fed Presidents Audition for the Next Fed Chairmanship
Income Mail by Bryan Perry
The Teflon Tech Sector Is Leading a Chaotic Market
Growth Mail by Gary Alexander
Soaring Deficits – Who Cares? (Congress Doesn’t)
Global Mail by Ivan Martchev
So far, the Stock Market Bottom for 2023 Still Holds
Sector Spotlight by Jason Bodner
Can The Best Trading Systems Be Replaced by… Pigeons?
View Full Archive
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Jason Bodner
MARKETMAIL EDITOR FOR SECTOR SPOTLIGHT
Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner
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