Planet Yelnick

Yves on The Financial Singularity: AI Impacting Stock Markets

Guestpost from Yves Lamoureux, who was über bearish last year, but is bullish this year. Technically, he sees the current market as finishing a wave 4 down, to be followed by a blow-off wave 5 to surprising highs. It may be driven by Fed panic and QE4, if not an outright NIRP. Fundamentally, as this post discusses, he thinks trading bots are evolving towards AI trading.

The financial singularity is upon us! We think about this point in time where artificial intelligence will be capable of recursive self-improvements in the financial affairs of humans.

Machines have been allowed to trade at incredible speeds. Now they have been allowed to learn. Our understanding of market mechanisms may be altered permanently. We use the language of waves to express our viewpoint. Increasingly it is usurped by machines that have no emotions.

So we put it to you. Why would waves work if the players don’t feel a thing?

We clearly understand this point as we have developed an alternative to forecasting models based on behavioral analysis. Progressively computers destroy what was reliable patterns to trade on. We see it in action daily. Certainly wave extensions are a good example. What would turn out to be a usual length now becomes almost perpetual. Thank the machines!

Most importantly is, in this environment, the ability to adapt as fast as you can to this paradigm shift. The invasion of blockchain in finance will further the advance of A.I. Human traders will be relegated to second tier markets and eventually be banished from trading all together. We have crossed this point in time where the future of finance may just be unfathomable.

At this moment, our models have generated large buy signals on the stock market. Like late 2008, where we called the bottom, our stocks did not make new lows in March 2009.

In other words, it’s a process. Notwithstanding summer weakness, we strongly believe that our picks have seen their ultimate lows. The mother of all crashes is coming but may be years away. We spent a good deal of time in 2015 shorting everything in sight.

This year paint us bulls.

CES2016: VR is the Hare, AR the Tortoise

VR was all over CES this year. Lots of excitement, but little content - and the incredible Oculus Rift has a catch: not only will it sell for $600, it requires a fast "gamer" PC to operate. It is believed that 2016 is the make or break it year for VR. As with 3D TV, which was flogged at CES for several years before being considered a flop, VR deserves and will have a longer gestation period. Besides Samsung and Sony, Google is working on a much less expensive VR headset. Yet, the hype could lead to a rejection. Instead, at CES I began to see the longer-term promise of VR's ignored cousin, AR.

 

I love CES!!! #ces2016 #lasvegas #samsunggear #hyphy

A video posted by Duncan Davidson (@duncandavi) on Jan 7, 2016 at 10:43am PST

AR has been rumbling and stumbling out of the gates. Google Glass was a flop. Microsoft shows promise with its HoloLens, but it is still a curiosity. Apple is said to be working on it, but then, Apple is said to be working on a lot of things. Its rumored plans to re-invent TV has never materialized.

The promise of AR was most visible in the auto section at CES. Lots of excitement over "3D dashboards" and the use of LADAR (laser radar) to image 360 degrees around a vehicle. You can already see this in high-end cars, where when backing out a 3D image around the car is shown on the dashboard screen. It is augmented with lines showing drivability. With LADAR now dropping fast in price, 3D dashboards should come to mainstream vehicles. With it should come augmented windshields, which show what is around the car with identifying information. Microsoft HoloLens could be used for this, and Apple is also rumored to be working on augmented heads-up displays for vehicles.

Where does this go? Right now, augmented 3D displays are only shown for slow speed driving, like parking or backing out. It would become hugely distracting for drivers at speed. Perhaps instead of augmenting reality for drivers, it will become the interface to make self-driving cars more intelligent. 

AR for robots, not people ...

Market is Finding a Bottom

Technical indicators say a bottom is forming, see the attached chart from AllAboutTrends. Fundamentals say the same: this is all about oil, and oil has already been forming a bottom. Markets should follow. Why this may be so is fascinating.  

We should expect a final "flight to quality" to US assets as economies around the world slow down, the US being the last market standing. This has been occurring - you can see it in the rise of the USD and especially in flight capital from emerging markets. It should spill over into equities, but for some reason selling pressure has been much stronger since the new year.

The countervailing force appears to be Sovereign Wealth Funds (SWF), particularly from oil states. Their SWF's are rainy day funds, and the drop in oil means it is pouring. Places like Saudi Arabia and even Norway have tuned their spending and welfare to $80 oil, and are draining capital at $30. The Saudi's have had to embrace austerity, and to raise cash have even announced the extraordinary event of selling shares in their Aramco oil holdings.

Problem is, SWF's tend to invest in long-term, illiquid projects. Airports, solar farms, other infrastructure. The top of their stack are stocks and bonds, liquid assets. These they are dumping to provide funds back to their governments. They started last year, selling European stocks.  This now appears to have tumbled into US equities. This should become clearer as reports come in, but the market won't wait. If oil has really found a bottom, and not a dead-cat bounce, US equities should turn, and turn rapidly.