Jill Malandrino of Nasdaq Trade Talks interviews Scott Juds about Merlyn.AI’s use of artificial intelligence in our Indexes and how it differs from the ChatGPT form of AI that we have been hearing about in the media. She also asks about how we use advanced signal processing to complement AI to further improve performance. Finally, Jill inquires about the recent nature of the market and how the algorithms have adapted to address it.
Jill Malandrino: Welcome to NASDAQ Trade Talks. I’m Jill Malandrino, Global Markets Reporter at NASDAQ. Joining us for the segment we have Scott Juds, CEO of Merlyn.AI to discuss improving investment decision making using AI in signal processing to detect trends in capital markets. Scott, it’s great to have you with us, welcome to Trade Talks.
Scott Juds: Thank you.
Jill Malandrino: You got it. We’ve seen so many headlines around AI recently, from OpenAI, Microsoft, Google, and others. How does Merlyn.AI use generative technology today?
Scott Juds: Well, there are certainly some exciting headlines about how rapidly AI is advancing today, particularly for natural language processing. There’s no doubt it has lots of future potential but we believe there’s an important difference between using AI to provide an analysis of everything ever written and using it for predictive purposes in chaotic markets. There are literally more forms of AI than there are flavors of ice cream. As signal processing engineers, we’ve been employing more targeted forms of AI such as adaptive tuning, fuzzy logic, and genetic algorithms for over 20 years. Why these forms? Because they are particularly helpful for reducing market noise, clarifying the momentum signal, and improving the probability of investing in a momentum leader. Momentum clarity is the name of the game and it’s what we do.
Jill Malandrino: How does AI’s approach to investment management differ from most other tactical investment methodologies?
Scott Juds: Our approach to index methodology design differs from others in the ways in which we combine AI with advanced signal processing to better detect trends and automatically rotate to defensive strategies when bear markets are indicated. Our indexes are literally complete, self-contained tactical portfolio management systems that evaluate hundreds of ETFs each month.
Jill Malandrino: How does your bull bear indicator determine whether to be in equities or not? How does that inform your process?
Scott Juds: Well, our storm guard, bull bear indicator, strives to answer the question investors continuously ask themselves, which is, should I be holding equities or holding defensive positions? Storm guard analyzes price trend, institutional momentum, and value sentiment indicators and distills this data into a single binary decision free from human bias. And so, it automatically informs our indexes whether to evaluate and select from equities or defensive positions.
Jill Malandrino: How are you adapting to today’s market challenges?
Scott Juds: Well indeed, between the on again off again COVID restrictions and economic over-stimulation leading to inflation, and then the Fed’s rapid rate hike response that trashed bonds, lasting momentum has been hard to come by and the need for new and better safety measures is on everybody’s minds. So we’ve innovated rapidly to adapt to this new environment by updating our methodology to include a second independent layer of defensive analysis in our bull market strategies that works in tandem with strong guard, and we call it trends guard. It acts to provide a performance backstop when market sectors and factors begin performing poorly. Storm guard and trend guard together create what we call dual defense. Storm guard is the first line of defense that seeks to identify whether the market is bull or bear, but then trend guard is the second line of defense that seeks to provide a momentum based backstop. We firmly integrated the dual defense algorithms into our indexes as of April 2023.
Jill Malandrino: How are investors deploying Merlyn.AI strategies?
Scott Juds: Well, the primary attraction for both individuals and advisors is the combination of tactical trading benefits and tax efficiency. In the taxable account, tactical trading for momentum or defensive purposes is generally subject to short-term capital gains rates but there are two ways to do tactical trading with tax efficiency to achieve long-term capital gains rates. One, manually trade the index components within an IRA account or, two, automatically trade the index components within a tax efficient ETF that tracks the index.
Jill Malandrino: Scott, you’ve written recently that conditions affecting the markets right now might track 2008. What do you see ahead?
Scott Juds: Yes, there are some elements from 2008 that are being repeated such as the recent bank collapses related to sharp interest rate hikes but, at the same time, there are other factors that don’t mirror 2008 at all. There’s no clear pattern, as evidenced by some of the legendary investors predicting doom and gloom while others see a strong bull market ahead. So, for us, what’s important is that our well-tuned, adaptive, automated dual defense indexes stand ready no matter which way the market goes. That’s what we do.
Jill Malandrino: And finally, Scott, where can viewers go to learn more about Merlyn.AI?
Scott Juds: Investors can learn more about our indexes at Merlyn.AI. Thanks for watching.
Jill Malandrino: All right, you got it, Scott, thanks for joining us. And thanks for joining me, I’m Jill Malandrino, Global Market Reporter at NASDAQ.