Can An AI Tool Help You Beat The Market?

Can An AI Tool Help You Beat The Market?
Russell Burns

about 1 year ago4 mins

  • Artificial Intelligence can be used to analyze huge amounts of data to help make more-informed investment decisions.

  • Danelfin, which is available to retail investors, uses AI to analyze stock features based on technical, fundamental, and sentiment indicators, and produces an AI score to predict the probability of a stock outperforming the market.

  • There are limits to its usefulness. The AI scores offer only a short-term view, so they’re best used in combination with other research methods.

Artificial Intelligence can be used to analyze huge amounts of data to help make more-informed investment decisions.

Danelfin, which is available to retail investors, uses AI to analyze stock features based on technical, fundamental, and sentiment indicators, and produces an AI score to predict the probability of a stock outperforming the market.

There are limits to its usefulness. The AI scores offer only a short-term view, so they’re best used in combination with other research methods.

Mentioned in story

Forget about how Artificial Intelligence (AI) tools might upend the world of student essay writing. The big news is how AI can now transform the way retail investors pick stocks, giving them the kinds of tools that used to be available only to deep-pocketed hedge funds and other institutional investors. So I’ve taken a look at a new AI-driven analytics tool to see how it works.

What’s the new tool?

It’s an analytics platform from a financial tech company called Danelfin, and it uses AI, machine learning, and other big-data tools to give regular investors access to the kind of information that institutional investors have.

See, when you’re thinking about investing in a particular stock, you probably weigh its fundamentals, technicals, and maybe sentiment indicators. You might even consider a combination of factors. Well, whatever your preferred measures, AI can massively boost your ability to process all that information. And Danelfin, which offers both free and premium paid plans, can do that hard work for you. Its AI analyzes 10,000 stock features per stock per day, based on more than 600 technical, 150 fundamental, and 150 sentiment indicators. That’s way more than a human could ever hope to process.

Sample of the hundreds of indicators used. Source: Danelfin.
Sample of the hundreds of indicators used. Source: Danelfin.

What’s cool about this platform is that it takes into account a huge amount of data and from that, it spits out an easy-to-understand global AI score, which ranges from 1 to 10. Stocks with the highest AI scores (7 to 10) have a higher probability of outperforming the market in the next 30 to 90 days, while stocks with the lowest AI scores (1 to 3) have a lower probability. For US-listed stocks, the benchmark is the S&P 500 index, and for European stocks, it is the STOXX Europe 600. Danelfin produces a ranking for the largest 1,000 stocks by market capitalization in the US, so it’s a whole universe to choose from.

Danelfin AI scores. Source: Danelfin.
Danelfin AI scores. Source: Danelfin.

What does it tell us about, say, Tesla?

You can crunch the AI score in many different ways, ranking the probability of beating the market solely on the fundamental, technical, and sentiment subscore indicators, according to your preference. And because the data workings are transparent, you can look under the hood for individual stocks, see what factors are impacting their price, and check out their historic AI scores. Let’s have a look at Tesla (TSLA), for example.

Tesla Danelfin AI score. Source: Danelfin.
Tesla Danelfin AI score. Source: Danelfin.

The current ranking for Tesla is a 3, a sell rating, as its strong fundamental score is outweighed by its low technical and sentiment scores. Here’s Tesla’s score, viewed over time.

Tesla Score Evolution. Source: Danelfin.
Tesla Score Evolution. Source: Danelfin.

According to its evolution, or its history, Tesla’s AI score fell below 7 in early November – so if you were following its recommendations, you would have sold out of any long positions you were holding then. And you’d now be steering clear of any new long positions until Tesla’s AI score improves to 7 or above, indicating a probability that Tesla might outperform the S&P 500 again. So in theory, for now at least, you’d be better off investing in the S&P 500 index tracker than in Tesla. Just remember this predictive AI is trying to create alpha, the outperformance of the benchmark – not absolute return.

So, what stocks does the tool rank high right now?

At any given time, you can see which stocks Danelfin AI rates as most likely to outperform their benchmarks over the next 60 days. Let’s start with the US ones.

Danelfin AI top 10 US rankings. Source: Danelfin.
Danelfin AI top 10 US rankings. Source: Danelfin.

Here are the top European ones.

Danelfin AI top 10 EU rankings. Source Danelfin.
Danelfin AI top 10 EU rankings. Source Danelfin.

It is no real surprise that oil and gas companies occupy many of the top slots on both sides of the Atlantic, since they’re enjoying the benefits of strong oil prices. In the US, the other companies making the list include chemical firm Dow (DOW US), FedEx (FDX) Verizon (VZ), and Kroger (KR). In Europe, there are a wider variety of sectors represented. BHP (BHP), Unilever (ULVR), Munich Re (MUVGn), Zurich Insurance (ZURN), AB InBev (ABI), Christian Dior (DIOR), and Nestle (NESN).

How do the Finimize analysts’ “ideas for 2023” score?

I thought it’d be fun to look at AI scores for some of the Finimize analysts' team “top ideas” for 2023.

Finimize analyst 2023 US-listed stock picks. Sources: Danelfin.
Finimize analyst 2023 US-listed stock picks. Sources: Danelfin.

But here, I ran into some of the limits to Danelfin asset coverage: the platform provides AI scores for stocks and sectors, but doesn’t cover ETFs or crypto. So instead, I included some sector rankings.

Top AI scores for US sectors. Source: Danelfin
Top AI scores for US sectors. Source: Danelfin

Some of the stock picks from the Finimize team boast strong AI scores, but others don’t – and that’s not entirely surprising. See, AI-related data can give you an important piece of the puzzle, but it won’t show you the whole picture. With their years of financial market experience, Finimize analysts already use fundamental and technical analysis in formulating their ideas – and are able to cast their eye across a long view or a short one. Danelfin AI looks only at the probability of performance versus the index on a 30- to 90-day basis – it’s not equipped to look long term. Still, with a huge data set like this, there are countless ways to use this information, find interesting investment ideas, and potentially improve your returns.

Finimize

BECOME A SMARTER INVESTOR

All the daily investing news and insights you need in one subscription.

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

/3 Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.

Finimize
© Finimize Ltd. 2023. 10328011. 280 Bishopsgate, London, EC2M 4AG