BEAR IN MIND
7/18/24 Prospero.Ai Investing (138th) Edition (Mid-week)
Heavyweight Boxing Champion Mike Tyson has a famous saying: "Everyone has a plan till you get punched in the mouth". Well, yesterday we got punched in the mouth. We had a plan, a good one actually, that had been working well for most of Monday and Tuesday. Then a haymaker of a left-hook came from an unlikely place. The former President of the United States, Donald J. Trump.
At this juncture, I feel it's important for me to pause and make a point. Here at Prospero, we are genuinely A-political. We don't lean red and we don't lean blue……we lean GREEN; not the party, but the little square pieces of paper, kind of green. Our primary allegiance is not to an elephant or a donkey, but to YOU, the Prospero Family. And we HATE talking about politics, unless it's politics that impacts the market. And that's exactly what happened yesterday. Let me explain….
Love him, or hate him, Donald Trump moves the markets with his words. The drop yesterday happened because of his words, and NOBODY saw it coming. Before the market opened yesterday, former President Trump made some very lukewarm comments about the U.S.'s commitment to defend Taiwan against a Chinese invasion, as well as his intention to restrict imports of technology to China. As you can imagine, Semiconductor stocks started tanking and the rest of the market followed suit. Why do I say that nobody saw it coming? Because QQQ and SPY Net Options Sentiments were still in the mid, to high 50's when the comments were made. In other words, hedge funds and institutions were extremely bullish and got taken entirely off guard. Why? Because there was a broadening in the market. Sectors were rotating from strength to strength. Small Caps were going bananas. And BOOM, the left hook came flying in.
While it's pure speculation as to Trump's intentions for his words, here's the reality. President Trump knows that Taiwan is utterly crucial for our Microchip infrastructure. So, maybe it was an off the cuff comment. But here's another theory (and this is purely a thought exercise). But Trump has been running an increasingly savvy campaign that has seen his win probabilities go up and up. Additionally, President Biden is experiencing mounting pressure from within the Democratic party to hand the torch to another candidate. In light of that, it would be savvy for any politician trying to win an election to throw any wrenches they can into anything their opponent has going for them.
Do we have tangible evidence that this was an intentional move to help him win the election? To be very clear we do not! But would it have been a savvy political move for Trump to attack his opponent's strength? 1000%.
There is one more piece of evidence for anyone to weigh themselves. Trump doesn't think interest rate cuts should happen before the election. There is now a 97.35% probability of a rate cut in September. If there's not a cut, then there is little doubt how bad that would be for the market. The market runs on expectations, and close to all of the models are factoring in that cut. So why would a person who measures economic success by the stock market make a suggestion that might hurt it? It would be a purely political decision. And to be clear, both parties are capable of moves such as this. Our job is to help you see the evidence, then form strategies that give you the best odds of success.
So, regardless of whether Trump's latest words were intentional or not, one thing is certain. The market made a significant correction yesterday. QQQ (tech heavy) dropped -2.94%. That's the largest drop of that magnitude in months. SPY dropped -1.40%. It was a rough day and everyone got punched on the chin.
So that brings us to an important question. What happens next? It's entirely possible that the market will "buy the dip" and make back the lost gains. Another possibility is that that correction continues. Seasonally, the last half of July is historically slow. On top of that, the market is way overdue for a cool off. Finally, we honestly don't know if this kind of vernacular by President Trump will continue until the election, or if it was a one-off event.
Regardless, we are going to maintain a defensive stance here at Prospero and encourage you to do the same. Consider increasing your hedges in SQQQ, as well as looking into gold (GLD), which is a great Trump hedge because people around him are talking about strengthening the dollar and GLD is a good thing to own for that.
We do not beat ourselves up about events that, in our view, are unpredictable. But once you see something and there is any level of expectation that it could happen again we have to adapt! Our hope is that we're better prepared to dodge those left hooks.
So what does that mean for us? It means until the election we will be a lot more active, even in our high conviction portfolio. We went overweight again this morning because we thought there could be a big reversal. But we were quick to hedge with APPN (Tech) and CCOI (Communications) because we added META as a communications stock. And that is how we will approach this indefinitely. We might lean a certain way to start a day, but by the end of the day we will hedge in case something is said overnight to move the markets before they open.
We realize this activity might not work for many and for you we’d say stick with stocks where Upside Breakout > 80 and Profitability + Growth > 120 and hold through this. Additionally, we would strongly suggest adding some SQQQ to that portfolio. At the bottom of these mid-week paid letters, we always list our suggested hedge.
On that note, because this is a unique time we are offering our largest summer discount ever, 40% linked here. Normally, there is only one other sale during the holidays. We want to make it easier for people to have access to our live risk management strategies. Not necessarily to make the same moves we do, but to see what we are adding; then be able to ask "why" in our chats, and see what works for you! Feel free to email me at george@prospero.ai if you’d like a free trial. The discount is only for yearly memberships and will run for one week. Happy to let people see how we work before making their decision.