Home Builders Stocks: AI Beats the S&P500 by 48.12%

Executive Summary

The purpose of this Home Builders stocks forecast report is to present the results of the live forecast performance evaluation of short positions for the Home Builders stocks package by the I Know First AI Algorithm. The following results were observed when the signal filter was applied. The evaluation period is from 1st October 2021 to 15th January 2023. The corresponding returns distribution of stock signal filters for this package is shown below:

The Home Builders Stocks Report Highlights:

  • The highest average return is 31.82% for the Top 10 Signals on a 1-year time horizon
  • The average return across all signal and horizon groups is positive while the S&P500 has a negative performance for the same period of time
  • Predictions reach up to a 100% hit ratio regardless of economic conditions

About the I Know First Algorithm

The I Know First self-learning algorithm analyzes, models, and predicts the stock market. The algorithm is based on Artificial Intelligence (AI) and Machine Learning (ML) and incorporates elements of Artificial Neural Networks and Genetic Algorithms.

The system outputs the predicted trend as a number, positive or negative, along with a wave chart that predicts how the waves will overlap the trend. This helps the trader to decide which direction to trade, at what point to enter the trade, and when to exit. Since the model is 100% empirical, the results are based only on factual data, thereby avoiding any biases or emotions that may accompany human-derived assumptions.

The human factor is only involved in building the mathematical framework and providing the initial set of inputs and outputs to the system. The algorithm produces a forecast with a signal and a predictability indicator. The signal is the number in the middle of the box. Predictability is the number at the bottom of the box. At the top, a specific asset is identified. This format is consistent across all predictions.

Our algorithm provides two independent indicators for each asset – Signal and Predictability.

The Signal is the predicted strength and direction of the movement of the asset. Measured from -inf to +inf.

Predictability indicates our confidence in that result. It is a Pearson correlation coefficient between past algorithmic performance and actual market movement. Measured from -1 to 1.

You can find a detailed description of our heatmap here.

The Stock Market Forecast Performance Evaluation Method

We perform evaluations on the individual forecast level. It means that we calculate what would be the return of each forecast we have issued for each horizon in the testing period. Then, we take the average of those results by strategy and forecast horizon.

For example, to evaluate the performance of our 1-month forecasts, we calculate the return of each trade by using this formula:

This simulates a client purchasing the asset based on our prediction and selling it exactly 1 month in the future.

We iterate this calculation for all trading days in the analyzed period and average the results.

Note that this evaluation does not take a set portfolio and follow it. This is a different evaluation method at the individual forecast level.

The Hit Ratio Method

The hit ratio helps us to identify the accuracy of our algorithm’s predictions.

Using our Daily Forecast asset filtering, we predict the direction of the movement of different assets. Our predictions are then compared against the actual movements of these assets within the same time horizon.

The hit ratio is then calculated as follows:

For instance, a 90% hit ratio for a predictability filter with a top 10 signal filter would imply that the algorithm correctly predicted the price movements of 9 out of 10 assets within this particular set of assets.

The Benchmarking Method – S&P 500 Index

In order to evaluate our algorithm’s performance in comparison to the US market, we used the S&P 500 index as a benchmark.

The S&P 500 measures the stock performance of the largest 500 companies by market cap listed on different stock exchanges in the United States. It is one of the most followed equity indices and is frequently used as the best indicator for the overall performance of US public companies, and the US market as a whole. The S&P 500 is a capitalization-weighted index, the weight of each company in the index is determined based on its market cap divided by the aggregate market cap of all the S&P 500 companies.

For each time horizon, we compare the S&P 500 performance with the performance of our forecasts.

Home Builders Stocks Performance Evaluation – Overview

In this report, we conduct testing of short positions for Home Builders Stocks that I Know First covers by its algorithmic forecast. The period for evaluation and testing is from October 1st, 2021 to January 15th, 2023. During this period, we were providing our clients with daily forecasts in time horizons spanning from 3 days to 1 year which we evaluate in this report.

(Table 1: Average Returns Per Time Horizon for the Home Builders Stocks Package)

As can be seen in the table above, our algorithm provided positive returns for most of the time horizons. The S&P 500 benchmark is outperformed in most signal groups for most of the time horizons. We see that we get the highest return for the Top 5 Signals group for all horizons except the 3-day and 1-year horizons where the highest return comes from the top 10 signal group.

home builders stocks: short term
(Figure 1: Average Returns Per Time Horizon Short Term for the Home Builders Stocks Package)
home builders stocks: Long term
(Figure 2: Average Returns Per Time Horizon Long Term for the Home Builders Stocks Package)

From the above charts, it is evident that as the forecasting horizon expands, the average returns tend to become higher. Ultimately, the I Know First algorithm shows the highest average return for the 1-year forecast as 31.82% for the Top 10 Signals which exceeds the S&P 500 index by 48.12%. In the 14-day period, the AI Algorithm was able to generate the highest return of 0.80% for the Top 5 Signals which exceeds the S&P 500 index by 1.09%.

home builders stocks: hit ratio per time horizons
(Table 2: Hit Ratio Per Time Horizon for the Home Builders Stocks Package)

According to the table above, all the signal groups across all time horizons gave a hit ratio greater than 50%. It should be noted that as the time horizon gets longer, I Know First hit ratios gradually increase from the 50% ratio interval for the short-term horizons to 100% at all subsets for the 1-year horizon. All across the board, as the time horizon gets longer the hit ratio increases for the Top 20 by 50%, the Top 10 by 49%, and the Top 5 Signals by 49%. Examining Table 2 shows that a hit ratio for the Top 10 Signals is associated with an average return of 31.82%.

home builders stocks: hit ratio
(Figure 3: Hit Ratio Per Time Horizon of the Home Builders Stocks Package)

Looking at Figure 3, it is clear that at the short-term horizons the hit ratios are relatively low at all signal indicators but the hit ratios increase over the long-term horizons showing the I Know First Algorithm is able to successfully predict most of the stock movements.

Home Builders Stocks: Conclusion

This report looked at the live performance forecast of I Know First data of short positions for the Home Builders Stocks Package from October 1st, 2021 to January 15th, 2023. From the above data, we can observe that the I Know First Algorithm is exceeding the S&P 500 benchmark index across all signal filtering subsets and forecasting periods in most groups. Data from Figures 1 and 2 above shows I Know First was able to generate a return that exceeded the S&P 500 return by 48.12% in one year. In the 14-day period, the Top 5 Signals index is 0.80% which exceeds the S&P500 index by 1.09%.