Big tech shows strong foundation
7/30/23 Prospero.Ai (46th) Weekly Newsletter
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Big tech shows strong foundation
For Tech: QQQ Net Options Sentiment > 40 = Bullish. < 30 = Bearish.
For Non-Tech: SPY Net Options Sentiment > 20 = Bullish. < 10 = Bearish.
QQQ returned 2.09% this week vs 1.05% for the SPY. With QQQ Net Options Sentiment returning to clear Bull territory, it is expected that the week would close as strongly as it did.
We used our guidance, especially QQQ Net Options Sentiment remaining strong, to give us the confidence to stay in all our Bull tech names. Our only hesitation was there was already significant gains this past week. The only time we’ve ever said we might change the picks mid-week. However, we saw the data we needed and for the 2nd week in a row this quote from our 2X weekly letter applies well to how we thrived in a tough week:
From our 7/18 letter: “We can only climb so high before we dip a bit so watch Net Options Sentiment as it could absolutely get you out of trouble if the market turns suddenly. But the general trend is clearly and decisively Bullish.”
And this 7/27 letter which all of the below analysis is from:
Us and others have been talking about how META and GOOGL will pace the market and they both did well. So we are short term Bullish now.
A lot was resting on ad performance as parts of the economy started to decline and these companies did a lot to reassure Bullish tech investors that their thesis was right. One thing we got clearly right on this one is our discussion that GOOGL was trading at a discount to MSFT relative to forward P/E. Contrast ads vs. CMG (Chipotle) reporting disappointing earnings ***warning to retail and consumer driven stocks*** which is a strong endorsement of our overarching thesis (check it out in the 7/3 letter) that tech would see a boost from Bullish guidance upgrades from AI and associated cloud revenues. You could have pulled this headline out of our newsletters:
Meta rallies as AI-powered ad sales drive 'monster' forecast
Not to mention these nuggets from a Cathie Wood interview on tech stocks:
Prospero identified META as a huge tech Bull long before tech expert Cathie Wood.
Facebook’s shift from the metaverse to AI is one of the big reasons that the stock has turned around. The other reason is, the company’s engagement numbers have been better than expected. Meta has a segmentation strategy—older people are on Facebook; younger people are on Instagram and WhatsApp. It remains to be seen for Threads, but I don’t think it will be the same as Twitter.
We have mentioned a few times reasons we are Bullish long term on TSLA even at these prices because it is more than a car company. And how their driving tech is rare and speaks to their AI capabilities because every other car self-driving car requires Lidar to work. But they also have big plans in robotics, more on TSLA bot. The fact that they are a leader in battery technology enables them to have bigger potential to run these robots more efficiently to boot!
Tesla’s competitive advantage is the billions of miles of real-world driving data it has compiled, which are used to train models to teach the car how to adjust to rare situations. No one has been able to do this because they don’t have anywhere near as much data.
Plus Cathie talks about NVDA as a great stock but also some concerns with overvaluation in the short to medium term and we agree with that. NVDA is a market leader and has a fantastic CEO but the Bull case especially at these prices rests on them maintaining a huge market share. And while this is possible it isn’t a given and that adds risk. Upstarts like one of our favorites SMCI as well as lots of smoke around Tech giants are rushing to develop their own chips. Such a Bull case being required to justify these prices a 57 Forward P/E vs. GOOGL at 23 even after their big trading day yesterday, you begin to see why NVDA feels like such a risky play to us.
We are upping our guidance levels due to highly Bullish SPY Net Options Sentiment.
For Tech: QQQ Net Options Sentiment > 40 = Bullish. < 30 = Bearish.
For Non-Tech: SPY Net Options Sentiment > 25 = Bullish. < 15 = Bearish.
Bear Potential - RXT (Rackspace Technology, Inc.)
RXT has poor long term metrics like low Profitability (35) + Growth (25) = 60. And Upside Breakout - Downside Breakout = -59 is also very good. The downward movement on Net Options Sentiment is the icing on the cake and made it the Bear we were most excited to add this week.
Bearish this week if:
RXT Net Options Sentiment < 50
RXT Net Social Sentiment < 60
QQQ Net Options Sentiment < 40
Bear Potential - AROW (Arrow Financial Corporation)
AROW has a very similar thesis to RXT but has an even steeper drop in Net Options Sentiment. Profitability (52) + Growth (42) = 94 is higher but still not great especially in the Finance vertical, where profits dominate.
Bearish this week if:
AROW Net Options Sentiment < 50
AROW Net Social Sentiment < 60
QQQ Net Options Sentiment < 35
Bull Potential - BABA (Alibaba Group Holding Ltd - ADR)
BABA got my attention because it appeared in our safest long term bets because of high Upside Breakout (76) low Downside Breakout (15) and high Profitability (73) but we were sold on the excellent trend downward in Downside Breakout as well as that coinciding with a positive price movement.
Bearish this week if:
BABA Net Options Sentiment > 75
BABA Net Social Sentiment > 50
QQQ Net Options Sentiment > 35
Keeps - Staying as a pick but unchanged guidance
Bull review - META (Meta Platforms Inc) from 7/23 letter and Bullish this week if:
META Net Options Sentiment > 75
META Net Social Sentiment > 50
QQQ Net Options Sentiment > 30
META returned 10.61% this week vs 1.05% for the SPY. Sometimes the signals make it this easy. Even though we were concerned there would be a hit to tech stocks, META has been close to a perfect score on META Net Options Sentiment + Upside Breakout so we gladly stuck it out. Dipping to 184 this week means this price run has cut into its strength in the short term options markets but anything over 180 is a pretty simple buy and hold from our perspective.
Bull review - TSLA (Tesla Inc) from 7/23 letter and Bullish this week if:
TSLA Net Options Sentiment > 75
TSLA Net Social Sentiment > 50
QQQ Net Options Sentiment > 30
TSLA returned 2.47% this week vs 1.05% for the SPY. TSLA also dipped a bit in Net Options Sentiment + Upside Breakout from 195/200 to 190/200 this week but overtook META for the top spot.
Bear review - AVT (Avnet from 7/23 letter and Bullish this week if:
AVT Net Options Sentiment < 50
AVT Net Social Sentiment < 60
QQQ Net Options Sentiment < 40
AVT returned 1.06% this week vs 1.05% for the SPY. This was a close call with some up and down metrics and Net Options Sentiment closing the week (57) more than we normally prefer but we continue to hold it as a tech hedge.
Bull review - CFLT (Confluent Inc) from 7/23 letter and Bullish this week if:
CFLT Net Options Sentiment > 70
CFLT Net Social Sentiment > 25
QQQ Net Options Sentiment > 30
CFLT returned -6.87% this week vs 1.05% for the SPY. Net Options Sentiment has back down to 73, just above our drop zone and we still like it long term with Growth (72) story but it remains on thin ice.
Bull review - ELF (elf Beauty Inc) from 7/23 letter and Bullish this week if:
ELF Net Options Sentiment > 70
ELF Net Social Sentiment > 50
QQQ Net Options Sentiment > 35
ELF returned 3.87% this week vs 1.05% for the SPY. Rewarding us for our patience, Net Options Sentiment (78) and Upside (74) to Downside Breakout (39) remain strong so we hold.
Bull review - PYPL (Paypal Inc) from 7/23 letter and Bullish this week if:
PYPL Net Options Sentiment > 80
PYPL Net Social Sentiment > 50
QQQ Net Options Sentiment > 35
PYPL returned 1.36% this week vs 1.05% for the SPY. PYPL continues to do well in both Net Options Sentiment (87) and Net Social Sentiment (72) we would be more concerned about earnings if tech did not look so Bullish last week. But we are a bit concerned overall that the credit crunch we keep discussing could show up in PYPL earnings.
Drops
KXIN is dropped as a Bear mostly because China appears to be taking a Bullish turn so we are cutting and running with a win. It ended the week down 5.11% first and last covered and a Win, beating the SPY benchmark by 4.06%.
SR is dropped as a Bear as because Net Options Sentiment is in a positive trend. It ended the week up .62% since first covered 07/16/23 and a Win, beating the SPY benchmark by 1.08%.
INFY is dropped as a Bear as because Net Options Sentiment is in a positive trend. It ended the week up .98% first and last covered and a Win, beating the SPY benchmark by .07%.