Bear with this?
10/29/23 Prospero.Ai Investing (70th) Edition (Weekend)
If you are wondering about the value of our upgrade look no further than an excerpt from our paid section 10/19:
In summary, if there is this much certainty that the market would not handle a hike right now; AND conviction is mounting of rate hikes persisting into 2023, its hard to not have a Bearish Macro outlook. (But as we’ve consistently stated, Big Tech / AI could very well weather that storm)
The market is down almost 5% since we pointed to this as well as our Bearish QQQ and SPY Net Options Sentiment trends.
Currently beating the S&P 500 by 75% on our 2023 picks, with a 65% win-rate per pick against S&P 500 benchmarks. On 10/13 we published our strategic analysis of our 9 month results and a shorter summary on Twitter/X.
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Bear with this? Outline:
Market Update
QQQ and SPY Net Options Sentiment and Portfolio Allocation
Portfolio Macro Strategy
How we are approaching the number of longs/shorts and sectors
Longs
Adds —> No Keeps —> Drops
Shorts
Adds —> Keeps —> Drops
Portfolio Allocation Notes
The market was extremely volatile this week. How we added upside, while limiting our risk.
Market Update
For Tech: QQQ Net Options Sentiment > 30 = Bullish. < 20 = Bearish.
For Non-Tech: SPY Net Options Sentiment > 15 = Bullish. < 10 = Bearish.
QQQ returned -2.62% this week vs -2.50% for SPY. Despite a few short Bull runs in recent weeks, our index levels have not been fooled as the market has stayed Bearish overall, oftentimes leading price downward.
There are two important things to keep in mind with these graphs:
The market does not see a lot of reasons to be Bullish right now.
Despite the bearish sentiment, be careful not to bet too much on a Bear run. You can lose the most money when the market direction seems “too obvious.”
To understand this market better, let’s zoom in on what happened with Prospero’s favorite stock overall in 2023, META.
META crushed earnings from a variety of angles. Among the strengths:
The growth in the company’s digital advertising was particularly impressive. Compared with 11% growth at Alphabet, the Family of Apps division reported a 23% increase in top-line sales.
Why did META’s stock go down after a huge year-over- year improvement, as well as a 21% beat of consensus EPS? The downward price action was the result of a simple mention of softening demand for ads, due to the conflict in the Middle East. This whole story serves as a warning, both for how worried the market seems to be about the impact of this conflict, as well as how sensitive it is to any bad news. We’re seeing this pattern despite this particular case offering plenty of good news. Honestly, it’s a very concerning trend.
We’re adjusting the QQQ levels, because SPY and QQQ Net Options Sentiment have converged. It means we are more worried about tech, and a break above 25 would be a Bullish signal, hence the adjustment.
For Tech: QQQ Net Options Sentiment > 25 = Bullish < 15 = Bearish.
For Non-Tech: SPY Net Options Sentiment > 15 = Bullish < 10 = Bearish.
Portfolio Macro Strategy
Things are stacking up quite Bearish, but considering what we stated above, this makes us concerned that it could flip on a dime. We’re worried enough about this scenario, to hedge a bit with a few Bulls that hedge our Bear portfolio well.
As a result, this week we’re going with 5 Bears and 2 Bulls.
Long / Bull Adds - Link to Below Picture
For the first time since we switched to this selection format, we are going away from both the technicals and our screener to select META. We see strength in the signals and view it as an excellent hedge against the market flipping Bullish this week. We’re making this decision, primarily because we believe it was hammered way too hard for a positive earnings report and if the market turns it will do very well.
We like CMG as an add, because despite macro spending concerns, it posted good numbers. This makes it a candidate to perform well, even if this week is tough due to worries around those issues. It also helps CMG stand out as a Consumer Cyclical stock that could weather the storm better than others.
Long / Bull Drops
Dropping LLY as a Bull, as it has a concerning technical setup. Covered 10/22-10/27 it finished -4.18% and a Loss, Losing to the SPY benchmark by 1.68%.
Short / Bear Adds - Link to Below Picture
It was a very volatile week with a lot of our Bears moving around at such a fast pace, we had to drop a few midweek. (BPMC and NSA)
We’ve added a diverse set of Bears, spread throughout 4 different sectors. We went further down the screener list to find one, primarily because we were looking for a Consumer Cyclical stock to be the other side of our CMG trade. We were trying to find one that had the right technical setup for a Bear. TRIP looked great for that!
Short / Bear Keeps
MGEE is a keep and returned .61% vs -2.50% for the SPY. It was kept because it is still the best Bear in the Utilities Sector and the technical setup still looks good.
Short / Bear Drops
NSA was dropped as a Bear 10/23 via chat to our paid subscribers, because Net Options Sentiment reached a concerning (> 70) level. Covered 10/15-10/23 and it finished -3.17% and a Win, Beating the SPY benchmark by 1.08%.
BPMC was dropped as a Bear 10/25 via chat to our paid subscribers. This was always our plan. Unless we were overwhelmingly convinced otherwise, we didn’t want to take a risk on earnings, and we were right with a huge 25%+ swing after up we dropped it. Covered 10/22-10/25 and it finished -4.48% and a Win, Beating the SPY benchmark by 3.63%.
Dropping IRBT as a Bear, as it was filtered out of the above screen. Covered 10/22-10/27 and it finished -7.30% and a Win, Beating the SPY benchmark by 4.81%.
Dropping FRHC as a Bear, as the technicals shifted. Covered 10/22-10/27 and it finished 6.97% and a Loss, Losing to the SPY benchmark by 9.46%
Portfolio Allocation Notes
2 Longs: CMG, META
5 Shorts: MGEE, PTCT, XRX, JBGS, TRIP
Nothing to add that hasn’t been said above.