eyeQ: examining downside risk for FTSE 100

Experts at eyeQ have used AI and their own smart machine to analyse macro conditions and generate actionable trading signals. This is what it makes of the recent market sell-off.

7th August 2024 10:47

by Huw Roberts from eyeQ

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eyeQ stock market graph

"Our signals are crafted through macro-valuation, trend analysis, and meticulous back-testing. This combination ensures a comprehensive evaluation of an asset's value, market conditions, and historical performance." eyeQ

FTSE 100

Trading signal: long-term strategic model
Model value:797.59
Fair Value Gap: -1.18% discount to model value
Model relevance: 82% 

Data correct as at 7 August 2024. Please click glossary for explanation of terms.

“Everyone’s got a plan until they get punched in the face”: Mike Tyson

One of the golden rules of investing is patience. Don’t panic and sell after big down moves. If you’re right sizing your investments and don’t need the money right here, right now, then playing the long game and sitting through the turbulent times (or ideally using them to add exposure) is the ideal strategy.

There is, of course, an exception to that rule. There are always exceptions! That is when there is a genuine game-changing event.

That is why we need to think about what prompted this aggressive sell-off in global equity markets. Is it fears of a US recession after recent economic data came in soft? Was it fears that the Bank of Japan has just committed a big error in tightening monetary policy too aggressively? Was it positioning with too many investors chasing the Magnificent Seven tech stocks, often using leverage, momentum or volatility strategies that sound clever but all boil down to the same thing – everyone was in the same boat chasing the AI plays higher and higher.

In reality, it was almost certainly a mix of all three, but that still begs the question – has there been a material change in the investment outlook?

eyeQ’s smart machine doesn’t capture positioning, so we can’t comment on how many people have already unwound their trades and how many are left trapped in positions they no longer want.

But the Bank of Japan policy stance, the health of the US economy, the impact these moves have on overall financial conditions and market liquidity…all these go into our models, meaning eyeQ can provide an instant ready reckoner of overall macro conditions.

The chart below shows the picture for the FTSE 100 using the tracking exchange-traded fund iShares Core FTSE 100 ETF GBP Dist (LSE:ISF). What do we see?

  • macro relevance is high (82%) – yes, positioning is important right now, but macro is critical too
  • the orange line shows eyeQ’s model value for the FTSE 100. It dipped sharply over the last week but has bounced back pretty hard.

The machine is saying overall macro conditions for UK equities have not undergone a big change. There may be more to come in terms of position unwinds. It will almost certainly take time for volatility to calm down. Both these suggest there could be more downside in the near term.

But, thus far at least, the macro environment has not undergone any big change that might suggest a hard landing is imminent and that recession fears have become a big headwind to equities.

eyeQ ISF graph

Source: eyeQ. Past performance is not a guide to future performance. 

Useful terminology:

Model value

Where our smart machine calculates that any stock market index, single stock or exchange-traded fund (ETF) should be priced (the fair value) given the overall macroeconomic environment.

Model (macro) relevance

How confident we are in the model value. The higher the number the better! Above 65% means the macro environment is critical, so any valuation signals carry strong weight. Below 65%, we deem that something other than macro is driving the price.

Fair Value Gap (FVG)

The difference between our model value (fair value) and where the price currently is. A positive Fair Value Gap means the security is above the model value, which we refer to as “rich”. A negative FVG means that it's cheap. The bigger the FVG, the bigger the dislocation and therefore a better entry level for trades.

Long Term model

This model looks at share prices over the last 12 months, captures the company’s relationship with growth, inflation, currency shifts, central bank policy etc and calculates our key results - model value, model relevance, Fair Value Gap.

These third-party research articles are provided by eyeQ (Quant Insight). interactive investor does not make any representation as to the completeness, accuracy or timeliness of the information provided, nor do we accept any liability for any losses, costs, liabilities or expenses that may arise directly or indirectly from your use of, or reliance on, the information (except where we have acted negligently, fraudulently or in wilful default in relation to the production or distribution of the information).

The value of your investments may go down as well as up. You may not get back all the money that you invest.

Equity research is provided for information purposes only. Neither eyeQ (Quant Insight) nor interactive investor have considered your personal circumstances, and the information provided should not be considered a personal recommendation. If you are in any doubt as to the action you should take, please consult an authorised financial adviser. 

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

Please note that our article on this investment should not be considered to be a regular publication.

Details of all recommendations issued by ii during the previous 12-month period can be found here.

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