Stock Picker: Sector Rotation with Dual Strategy (FA)

Overview and Suitability: The robot is an advanced AI-powered trading robot designed to identify optimal investment opportunities by leveraging sector rotation and fundamental analysis (FA). It works by selecting the most promising sectors of the economy at any given time and then focusing on specific companies within these sectors. The robot specifically trades holdings from sector ETFs, including XLF (Finance), XTN (Transportation), XLK (Technology), XLC (Communication), XLI (Industrials), XLE (Energy), and XLV (Healthcare).

The robot is particularly suited for traders and investors looking to capitalize on sector performance trends and those who prefer a fundamental analysis-driven strategy. By using a combination of sector rotation and stock selection based on core financial metrics, it aims to balance profitability with risk, making it suitable for both medium to long-term investors.

Strategic Features and Technical Basis

The robot operates on two key strategies:

• Sector Rotation: Trend Trader identifies which economic sectors are performing best at a given time and selects holdings from associated ETFs. This allows the robot to remain flexible and responsive to changing market conditions. Sector rotation is a well-established investment strategy that aims to exploit the cyclical nature of different industries in response to broader economic trends.
• Dual Fundamental Strategies: The robot employs two fundamental analysis strategies to filter and rank stocks:
  • Acquirer's Multiple (AM): Developed by Tobias Carlisle, this valuation metric focuses on identifying undervalued companies by calculating the ratio between a company’s enterprise value (EV) and operating earnings (EBIT). The goal is to identify companies that have strong earnings potential but are priced lower than their true value. The Acquirer’s Multiple is effective because it factors in both debt and equity, providing a fuller picture of a company's valuation.
  • Proprietary Gainer Strategy: This proprietary metric scores a company's growth potential on a scale of 0 to 6, based on six key financial indicators. The score reflects the company's performance in its most recent quarter relative to the average performance of the previous four quarters. This makes the robot especially effective at identifying companies with high growth potential.

Key Strengths of the Acquirer's Multiple (AM) Strategy:

• Focuses on True Earnings Power: By using EBIT, it offers a clearer picture of a company’s core earnings, excluding non-cash items like depreciation.
• Comprehensive Valuation Metric: EV incorporates both debt and equity, giving a more holistic view compared to simpler valuation metrics like P/E ratios.
• Identifies Undervalued Companies: This strategy is excellent for finding companies that are likely undervalued, making them prime candidates for investment.
• Historical Performance: Empirical data suggests that portfolios based on the Acquirer’s Multiple often outperform broader market indices over time.

Key Strengths of the Gainer Strategy:

• Growth-Oriented: It identifies companies with solid growth momentum by looking at their quarterly performance in detail.
• Quantitative and Systematic: The scoring system is rule-based, ensuring consistency and reducing subjective bias in-stock selection.

Position and Risk Management

Position sizing and risk management are critical components of the Trend Trader robot’s functionality. The robot limits the number of open trades to 20, with each strategy contributing equally:

• 10 stocks selected by the Acquirer's Multiple strategy.
• 10 stocks selected by the Proprietary Gainer Strategy.

Each stock position is protected by an initial fixed stop-loss of 25% to manage downside risk. The stop-loss ensures that no individual trade can result in significant losses, protecting the overall portfolio from sudden market downturns.

Position Selection Process:

• After filtering and ranking potential trades, the robot selects the stocks with the highest scores to establish long positions.
• Trades are executed using market orders within the first 1-2 hours of the market opening, ensuring that the robot capitalizes on optimal liquidity and entry prices.

Monthly Rebalancing

To keep the portfolio aligned with market conditions and new data, the Trend Trader robot conducts its analysis at the beginning of each month. This regular monthly rebalancing ensures that the selected sectors and stocks remain relevant and adjusted to any macroeconomic shifts or sector-specific trends. By refreshing the portfolio with a monthly cadence, the robot avoids overcommitting to outdated or declining sectors, providing investors with timely adjustments. Sector Rotation Dual Strategy offers a unique combination of sector rotation and fundamental analysis, focusing on identifying undervalued and high-growth companies. Its emphasis on strategic diversification across sectors and its robust risk management mechanisms make it an excellent tool for traders seeking to capitalize on long-term trends while mitigating potential risks.

Trading Dynamics and Specifications:

• Maximum Open Positions: Medium, allowing for diversified exposure while managing concentration risk.
• Robot Volatility: Medium, offering a balanced approach between capturing significant market movements and mitigating sharp declines.
• Universe Diversification Score: High, indicating a broad array of instruments to hedge against sector-specific downturns and enhance profit opportunities.
• Profit to Dip Ratio (Profit/Drawdown): High, suitable for traders who are able to tolerate and manage greater levels of risk in exchange for potentially higher returns.
• Optimal Market Condition: This robot shows its best performance when market volatility is high, making it particularly adept at navigating turbulent market phases.

Disclaimer:  Disclaimers and Limitations 

Simulated Performance: All simulated performance results are derived solely from real-time calculations using historical data. Algorithms receive minute-by-minute historical prices and other data from Morningstar and generate trades in real time based on these historical inputs, effectively eliminating any hindsight bias. 

Actual Performance: All actual performance results are derived solely from real-time calculations using current data. Algorithms receive minute-by-minute current prices and other data from Morningstar and generate trades in real time based on these current inputs, effectively eliminating any hindsight bias. 

Gross Performance: Gross performance results do not deduct any fees or expenses. These results reflect the total returns generated by the AI Robots without considering the costs associated with accessing the service. 

Net Performance (current performance chart): Net performance results deduct fees to provide a more accurate representation of returns experienced by the user. These deductions can include: Model Fee Deduction: Net performance results may deduct a model fee equivalent to the highest subscription fee charged to the intended audience. Actual Subscription Fees: Net performance results may also deduct the actual subscription fees paid by the user for access to AI Robots.