DO OR DIE
03/09/25 Prospero.ai Investing - 201st Edition (Weekend)
"TO DO OR DIE" is a phrase that can trace its origins back to the late 19th century when it appeared in Alfred Lord Tennyson's 1854 poem, The Charge of the Light Brigade. Tennyson's poem was written in a military context where he writes about the life or death dilemma facing the common soldier. He writes…
Theirs, not to make reply,
Theirs, not to reason why,
Theirs, but to do or die.
The phrase expresses the sentiment that a soldier facing an imminent battle has only two choices: succeed or die in their failure. In a far less dramatic fashion, this statement applies to the market in the days ahead. Obviously in the stock market we aren't facing imminent death; but we are, WITHOUT QUESTION at a very dramatic crossroads. To visualize it, check out the SPY (S&P 500 ETF) Daily Chart below.
Look at the red circle. The horizontal blue line represents an important "bottom resistance" level for the S&P 500 Chart. As you can see, for weeks now, that blue line has served as a bottom in which the market bounced upward. As of last Friday, we're sitting right on that blue resistance line. Now look at the yellow line. That's the SPY 200 day "moving average". The 200 day moving average, has traditionally been a very reliable level where the S&P will bounce upward. Now, look one more time (carefully) at the red circle. Interestingly, that (blue) bottom resistance level and the (yellow) 200 day moving average converge together and we are sitting right on top of it.
Interestingly, if you look at SPY on the app; our New Technical Indicator is at a 74. That's a pretty good number. In a Bull Market, you can almost bet the farm that we rally right here! So why do we say it's "Do or Die" time? Because if we bounce off the 200 day moving average, there's a decent chance the Bull Market continues. If we drop below this convergence of bottom resistance and 200 day moving average, then things could get real ugly in a hurry!
Now, let me give you some good news. We are in VERY oversold territory. The law of Mean Reversion would say we are way overdue for a bounce. Second, Friday's candle was a green "Hammer Doji" candle, which often signals a bullish reversal. Both good signs. BUT, I have some bad news. The bad news is that we ended the day last Friday with SPY Net Options Sentiment at ZERO. QQQ was a little better, but still at a Bearish 20. Here's one very important data point to remember. Historically, when Net Options Sentiment drops to zero and stays there, it means steady declines are coming.
Think about it for a second…If the SPY chart was sitting at the 200 day moving average AND the Net Options was a Bullish 50, I would take every penny I could get my hands on and pile into this market. But the fact that SPY Net Options is at Zero; that DEEPLY concerns us. It means that hedge funds and institutions are very bearish, despite the positive technicals. Then, add on the fact that this market is just flat out hard to trade right now. Sectors are jumping in and out of relevance like the early 2000's boy bands. On top of that, intraday market trends change back and forth several times in a day. It feels like we're always a step behind. And one final data point. NVDA (the market standard bearer) and TSLA, are both sitting squarely at their 325 day moving averages. That is typically the "last line of defense" before a stock is officially in bear territory.
So, that brings us to an all important question, how do we trade this market? As our CEO says, "When a problem seems big, shrink the problem". We suggest that you don't jump into too many trades right now. Be VERY selective in your Bullish long pics. You might miss out on a relief rally, but you would also miss out on a stronger correction if we lose the 200 DMA. As for us at Prospero, we're entering the week with our fingers crossed that things don't get uglier. We're going to start Monday with a lot more Bear pics than Bullish longs. And as old Alfred Lord Tennyson would say: "ours is not to wonder why, but ours is but to do or die". Now a word from our CEO.
A WORD FROM OUR CEO
We updated our short intro + learning videos to include our new full app tour as well as advice on how to use this letter.
We took a bit of a risk on Friday guessing on what would be added to the S&P 500. (We thought APP, IBKR, COIN and HOOD had good shots) We were wrong but as it always is, an opportunity to share a lesson. When market direction is unclear, event driven strategies can become more appealing. We did well overall in our event driven MSTR/COIN strategy. We are continuing our coverage of Applovin shorters. AppLovin short-seller urges exclusion of the stock from S&P 500 index
“We are writing to the committee regarding very serious allegations that have been raised against a company that will potentially be added to the S&P 500, AppLovin (APP),” Fuzzy Panda wrote in a March 4 letter to the committee, which is responsible for making quarterly changes to the index. CNBC viewed a copy of the letter.
Cloud software vendor Workday was added in December, even though it was valued at tens of billions of dollars less than AppLovin.”
It’s a good reminder that we are in Bearish times with SPY net Options Sentiment at 0. There are more sharks swimming in these waters. It is clear to us at this point… Unless we see see the market hold this floor we will take a much more risk-off approach with a smaller portfolio.
It was a lot of work but on very tough week for the market we are in a better spot than last week. Our paper trading portfolio is beating the S&P 500 by 46% annualized, with a win rate of 66% against SPY benchmarks.
Regular streams this week - Monday 3/10 at 11 AM ET and Wednesday 3/12 at 3 PM ET.
Don’t have our app yet? Use it to track your investments with Prospero’s proprietary AI tech.
DO OR DIE
Market/Macro Update w/ Cap/ Value Analysis
QQQ and SPY Net Options Sentiment
Sector Analysis
How we view the Sector performance and momentum
Portfolio Strategy
Putting it all together to make a portfolio that first controls for risks but also has upside
Longs
Adds —> Keeps —> Drops
Shorts
Adds —> Keeps —> Drops
Portfolio Summary
CAP/VALUE ANALYSIS
It hasn't been a great week again for all style boxes, with value Large and Mid Cap faring better than most. Growth remains challenging during uncertain times, as expansion plans are put on hold, and investor confidence is shaken. We will continue to monitor the situation closely and tilt our portfolio to fit the new paradigm we are seeing both on the long and short books.
SPY/QQQ NET OPTIONS SENTIMENT
SPY NOS continues its spiral in flatline territory with the broader economy slowing down as a result of uncertainty due to unfavorable trade policies and weakening consumer expenditure. We continue to be bearish in our portfolio structure and will remain as such until we see any signs of recovery in our signals.
QQQ NOS remains bearish as no catalysts have presented themselves as of yet, although there is a bifurcation in the space with Communication Services fairing slightly better than Tech as a whole. We continue to play the upside on select names, but overall remains bearish in the short term and will seek to add exposure in our short book.
SECTOR ANALYSIS
Just as with the Cap/Value analysis, we are witnessing a significant shift in the sectors currently favored by investors. As noted in previous weeks, Consumer Defensive and Healthcare sectors continue to be strong performers. Conversely, sectors that have been favored in the past are experiencing ongoing challenges. Specifically, as additional macroeconomic data is released, sectors such as Consumer Discretionary and Technology are likely to face continued pressure. This is because growth expectations are being reduced, as investors are factoring in an uncertainty premium to already high valuations.
PORTFOLIO STRATEGY
With the market continuing to show signs of weakness—SPY NOS flatlining and QQQ NOS remaining in bearish territory—we will maintain our net short positioning. Our strategy remains focused on sector and market cap diversification, as we lack strong convictions regarding the absolute strength of any sector in the current bull market. We are more even short/long this week out of precaution, as we did see the bounce off the SPY 200 day moving average. We will start the week with 7 longs and 8 shorts. But we will be quick to exit the longs if the market looks tough tomorrow morning.
Long / Bull Moves
Long / Bull Moves - REGN, LMT, TPL add/ ULTA, IBKR, APP and HOOD holds/ LLY, BABA drops
Adds
REGN was added for its good EPS/Sector and Healthcare exposure. LMT was added because of its highly impressive overall Screener ranking. And TPL was added for its strong Screener performance for an energy stock.
Holds
ULTA was kept for its good Net Options and excellent EPS/Sector as well as smaller market cap. APP, IBKR and HOOD were all kept because they were added to the S&P 500 and would get a bounce. They instead went in the other direction. So as we have in the past with our ABNB short, we are holding because they went down after market and we have to take our lumps.
Drops
LLY was dropped because it performed poorly in our value metrics. BABA was dropped for its poor Tech Flow.
Short / Bear Moves
Short / Bear Moves - GLP, TGI, SFIX, SMFG, NVS, KTB and ARES adds/ TSM hold/ HLI, DELL, FYBR, MS, NTAP, HAL and RARE drops
Adds
GLP was added for its low 52 Week High, EPS/Sector and favorable Net Options sentiment. TGI was added for its low 52 Week High and EPS/Sector. SFIX was added for its Consumer Cyclical exposure and low EPS/Sector. SMFG was added for its low 52 Week High. NVS was added for its larger market cap and low Net Options. KTB was added for its low Net Options and Consumer Cyclical exposure. ARES was added for its low Net Options and EPS/Sector as well as larger cap Financial Services exposure.
Holds
TSM was kept with low Tech Flow and Net Options and larger market cap.
Drops
HLI, DELL, MS, NTAP, HAL and RARE were all dropped as they performed poorly in our screener. FYBR was dropped as we didn’t want Communication Services exposure this week.
Portfolio Summary
Long / Bull Moves - REGN, LMT, TPL add/ ULTA, IBKR, APP and HOOD holds/ BABA, LLY drops
Short / Bear Moves - GLP, TGI, SFIX, SMFG, NVS, KTB and ARES adds/ TSM hold/ HLI, DELL, FYBR, MS, NTAP, HAL and RARE drops
7 Longs: REGN, LMT, TPL, ULTA, IBKR, APP and HOOD
8 Shorts: GLP, TGI, SFIX, SMFG, NVS, KTB, ARES and TSM
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