Computer Models are Bearish

An article in The Wall Street Journal reports that trend-following investment strategies have “gone from bullish to bearish to a degree not seen in a decade, according to an analysis of algorithms that buy or sell based on asset-price momentum.”

The findings come from research by quant investment firm AlphaSimplex Group LLC “based on models that gauge the magnitude of price moves and perform like typical trend-following algorithms.”

AlphaSimplex’s chief research strategist Kathryn Kaminski is quoted: “Pretty much any way you run the models, you end up net short a lot of asset classes.” The article explains that the shift occurred amidst weak economic data and geopolitical uncertainty late last year that raised concerns about the rate of global growth.

The bearish position by these trend-followers, however, is “at odds with many Wall Street analysts, who largely believe the stock selloff has been overdone,” the article states. Some investors also view algorithms as the source of market declines, arguing that these strategies reinforce volatility since they react to price swings by crowding trades.

The article concludes that “using mathematical models to predict where markets are headed has been difficult as prices have been whipsawed by trade negotiations and mixed economic signals.”