Best way to use Prospero?
9/12/24 Prospero.Ai Investing (154th) Edition (Midweek)
For those that don’t know, I (George Kailas, Prospero.Ai CEO) offer free investing tutoring. I’ve actually been doing this since before our app was distributed because it is something I care deeply about. But it’s also been a great source of product improvement and discovery for Prospero. Net Options Sentiment was invented on one of these tutoring sessions, when I was having trouble explaining an options chain and finally said “What if I just told you the options markets liked this stock or didn’t like it?” The answer was really all that I needed. “If you can tell me THAT we are probably wasting our time with this lesson.”
After doing more than my share of these lessons around the best uses of Prospero’s signals, I thought it would be helpful to put all of my best general advice in one place…
Long Term Investing
First of all, it’s important to know our Upside Breakout Backtest. When we looked at the roughly 10-50 stocks that had an Upside Breakout score greater than 80 (in our bell curve on a given day) and held them for a year, 80% of them in our 5 year backtest of the Upside Breakout portfolio won! That is remarkable consistency. So when you’re looking long term, you can almost never go wrong by looking for stocks with > 80 Upside Breakout.
Here are some other quick rules:
You want Upside to be 30+ points higher than Downside
You want Profitability + Growth to be greater than 120
A few caveats:
Sector or Cap matters. Certain Sectors (Like Financials or Energy) will run lower than others. I’ve been long in these Sectors when they had closer to 55/45 Upside to Downside ratio. Diversification matters, so consider this when building a portfolio.
Trend matters. If a stock had a 90 Upside the week before, but now is at 81, that is a dangerous pick.
Short Term Trading (can also be used to time entries and exits on long term stocks)
Net Options Sentiment is the big key here and we did a longer overview of this signal in our letter this past Sunday.
Exit a long or a short, if Dark Pool + Short Pressure is greater than 140. We view this as too risky overall.
We view less than 50 as a universal exit position for a long; and less than 50 as a universal exit position for a short.
Even a 10 point move in Net Options Sentiment in the wrong direction of your trade should make you consider an exit or reduction in position.
Net Social Sentiment < 30 for a long; or > 70 for a short is an exit condition.
A few caveats:
Especially when it comes to Net Options Sentiment, observe the prior trend. Some stocks can bounce between 20 and 80 in a day if there are not tons of options contracts and options swing trades happening. Look at the time series to see if the stock is typically volatile; and if so, observe the highs and lows to decide how to place the current trend. If it is bouncing around its normal range this shouldn’t be a buy or sell signal.
Same as with long term benchmarks. We added Starbucks today at 50 Net Options Sentiment, because it marked a big trend reversal for that stock and it paid off! You might be asking: “well isn’t this against your rule of greater than 50 Net Options Sentiment above?” Yes, but this is where nuance is important, as it is in a lot of trading activities. You can lean on the “move rule” here. If the setup is attractive for a stock with 50 Net Options Sentiment, you should be highly sensitive to trend change. We would be pretty quick to exit if it went below 40.
A WORD FROM OUR CEO
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