Momentum detection is key to how we select bull and bear market funds.
The challenge is to see past market noise to select momentum leaders.
Keys to Our Approach
We seek momentum leaders in bull markets
We automatically rotate to defensive positions
We deploy AI and advanced signal processing to clarify market data
Feel the Heat
Every month some sectors lead the market while others lag. You can see it in a market heat map.
Ideally, we’d like to jump from momentum leader to momentum leader, always riding the top wave of the market. The challenge for any investor is to identify these momentum leaders.
Momentum detection is key
to selecting funds in both bull and
You need an unbiased mechanism
to tell you when a bull or bear market is indicated to inform objective decisions about when to get in or out of equities.
While we aim to identify momentum leaders in a bull market, we also employ our proprietary StormGuard™ and TrendGuard™ as we seek to protect against downside risk.
Our market risk assessment software seeks to determine when a bull or bear market is indicated using multiple market metrics.
Merlyn.AI’s indexes automatically switch between equity and defensive positions based on StormGuard’s bull/bear assessment.
Our second line of defense recognizes the limitation of momentum-based analysis in an irregular cycle like 2021-2023 and seeks to achieve a performance floor in a bull market.
TrendGuard presents a new defensive backstop that competes against an index’s category momentum leaders for selection.
In a Perfect World…
In a perfect (hypothetical) world, we would analyze the performance of market sectors and factors every month and invest in the one with the greatest momentum. We’d repeat this each month, switching from one leader to the next with the goal of outperforming the market average.
For example, this list of sector and factor ETFs represents momentum leaders. The illustration of the performance chart demonstrates the potential to outperform the market average by switching from one momentum leader to the next.
While this depiction is merely an illustration, it is also a way of visually understanding what Merlyn.ai does in identifying momentum leaders and, among them, and seeking to invest in those with greatest performance.
We believe simple moving averages distort the true pulse of the market by giving equal weight to each day over the period. A simple 200-day moving average, for example, weights the price 200 days ago as much as yesterday’s.
Decades of data research tells us momentum value is greatest in the near past and trails off. That’s why we use differential signal processing and matched filter theory to reduce market noise, assess its characteristics, and adaptively tune our momentum filters – all of which are intended to improve the selection of momentum leaders.
Simply put, cleaner signals lead to the possibility of better decisions.
- Each month, Merlyn.AI strategies assess the performance and momentum of hundreds of ETFs across a broad array of sectors and factors.
- Our goal is to identify those with greatest momentum for selection in our indexes.
- Leading ETFs are grouped by sectors and factors into competition rounds, then guided by our proprietary tuned genetic algorithms.
- Winners compete with winners to determine an ultimate lineup.
How it Works
StormGuard™ Assesses Market Direction
StormGuard, the first component of our Dual Defense™, determines when a bull or bear market is indicated using multiple market metrics. It Is designed to detect the onset or a protracted bear market that could last months or even years. SwanGuard™, a StormGuard component, is designed to detect the onset or a precipitous market drop triggered by a “black swan” event.
Learn how StormGuard works by visiting our sister site alphadailybrief.com.
When a Bull Market is Indicated
Select Momentum Leaders
- Our self-evolving strategies use Al-based genetic algorithms that seek to learn from market behavior.
- The process evaluates up to 400 ETFs to select sets of candidate funds for an ever-evolving population of competing momentum strategies.
- They choose only the top momentum performers for the portfolio.
- This helps mitigate the risk of human-based hindsight selection bias in the ETF selection process and enables the index to adapt to changing market conditions.
- TrendGuard, the second component of our Dual Defense™, seeks to achieve a performance floor.
- Recognizing the limitation of momentum-based analysis in an irregular bull market cycle like 2022-2023, this component Introduces a defensive backstop that competes head-to-head with sector and factor momentum leaders during the portfolio construction stage.
- The backstop Is selected whenever its momentum is the highest.
When a Bear Market is Indicated
- When bear market conditions are indicated, Merlyn.AI ETFs switches to a defensive strategy where it generally selects a portfolio of four or more momentum leading ETFs from our bear universe.