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05/18/25 Prospero.ai Investing - 221st Edition (Weekend)
Hey Prospero Family! Welcome to our weekly newsletter. We hope you had an incredible and restful weekend. Here's what we want to accomplish in the introduction. First, we want to talk about the U.S. credit downgrade that was announced after the market closed on Friday. More importantly we'll discuss the historic responses to the downgrade. Second, we'll look at just how accurate and predictive Prosero's signals have been (particularly Net Options Sentiment) at showing us future market movements. Finally we'll briefly give our plan for how to trade this coming week and how if things play out historically, we might be facing an amazing money making opportunity! Let's jump in.
After the S&P had gone on a remarkable run back to within a few points of its all-time high, on Friday after the market closed, Moody's downgraded the U.S. sovereign debt from its top tier, Aaa to Aa1. That's significant, because it was the last major credit rating still giving the U.S. a top tier score. In a Wall Street Journal Article on Friday, author Matt Wirtz gave the reasoning behind the downgrade. He wrote: "successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large fiscal deficits and growing interest costs." Why Moody's chose Friday to make the downgrade is unclear; but here's where the rubber meets the road for us.
After the market closed, the S&P dropped a full 1%. What will happen on Monday morning is unclear, but historically when there's been a US credit downgrade, the market reacts negatively for a few days. For example, in 2011 Moody downgraded U.S. debt and the market fell over 5%. The same thing happened in 2023 and the S&P dropped over 1%. The good news is that in each instance, after a few days the market rebounded sharply! We simply don't know if a drop and subsequent rebound will happen again, but if history repeats, we're due for some downside Monday morning, and within a few days we could see a big recovery.
What's fascinating, is that once again, before the downgrade, our SPY Net Options scores reflected that Institutions and Hedge Funds were concerned about the market as a whole. On Thursday of last week, SPY Net Options ended the day well over our bullish line of 40. That's where it's been camping out for some time. But when the market opened on Friday, SPY Net Options dropped into the 20's, then by 12 pm EST, SPY NOS dropped off a cliff and went as low as 14! Whenever we see a drop like that, it signals (in real time) that institutions and hedge funds have turned bearish compared to recent days. We say it all the time, but if you're not actively utilizing our Net Options Scores as an active part of your trading and investing you're missing out on some really powerful information! Check out the SPY Net Options Graph below.
Look at the dark purple line, all the way back to February 24th. LONG before the S&P 500's price made its historic drop, our SPY Net Options Sentiment dropped to ZERO. As a matter of fact, even when the market was just below its all time high, we saw SPY Net Options plummet and we knew something was up. We warned our readers in our newsletter that we had officially turned bearish. You can read it here: DON'T F' WITH OUR MONEY!
Shortly after, the market went on a historic bearish correction. But then on April 22/23, after some up and down volatility in our SPY Net Options Sentiment, our signals crossed above our bullish level (40) and stayed there. On April 23 we sent out a post on X…
"UPDATE! SPY and QQQ Net Options are still bullish heading into close. This is the first day in a while we've seen our numbers cross into bullish territory and stay there. Is more upside coming?"
The answer was yes. Since then, the market has been on a sharp, bullish, V-shaped run and hasn't looked back. That is, UNTIL Friday after the close, when the downgrade was announced. So this begs the question; how are we going to approach this coming week, which after a credit downgrade, has resulted in a market decline?
There are two important data points that will inform our strategy. First of all, it's important to understand that on top of the credit downgrade, our SPY Net Options scores have us a bit concerned overall. As you can see from the chart above, SPY Options Sentiment has been slowly trending downward for a bit. Trends in these sentiment numbers matter; so it's something that we're watching closely. The second data point that informs our strategy, is that despite the SPY Net Options dropping on Friday, our QQQ Net Options numbers remain above the bull line! That is likely due to how markets have reacted historically to downgrades (a drop, followed by a recovery.)
In light of those two data points, we will begin the week looking to play defense. When the market opens on Monday, we'll be watching our SPY (and QQQ) Net Options Sentiment numbers very closely. When and if those SPY numbers pivot bullish, we will too! The bad news is that we don't know if the market will follow historic trends. But the good news is that no matter what happens, we have Prospero's signals to guide our path forward! Now a word from our CEO.
A WORD FROM OUR CEO
We are still in risk management mode above all else and had a small boost this week over the last, our paper trading portfolio is 82% above the market annualized with a win rate of 61% against SPY benchmarks.
Our short intro + learning videos get you up to speed on how best use our letters and app to increase your wins.
Regular stream times this week. Monday 5/19 at 11 AM ET and Wednesday 5/21 at 3 PM ET.
Track all of your investments in real time with our app. Prospero’s proprietary AI tech updates key options signals like Net Options Sentiment, Upside and Downside every 3 minutes.
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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/ ANALYSIS
Growth remains intact, though Monday's market open will provide further insights. Large-cap stocks are benefiting significantly from the recent upswing, with multiples expanding favorably. Meanwhile, value continues to lag, but a potential resurgence remains on the horizon—especially if hard data signals a meaningful slowdown in consumer spending. Tariff impacts, which may unfold more gradually than expected, could also play a role in shaping market dynamics.
SECTOR ANALYSIS
Technology is surging, fueled by optimism surrounding AI proliferation following last week’s Middle East visit and strong capital expenditures in the sector. Consumer discretionary remains resilient, with hard data showing no signs of a slowdown in spending. While Healthcare continues to face headwinds, the worst of the market reaction may be behind us, as mean reversion and increasing legal barriers temper concerns about sector-wide risks. For those looking to capitalize on tightening credit conditions, Real Estate presents an intriguing pressure point.
QQQ NET OPTIONS SENTIMENT
As we noted above while SPY Net Options Sentiment is starting to paint a gloomy picture, QQQ remains bullish.
But as last week demonstrated, market sentiment can shift rapidly. Maintaining a forward-looking perspective is essential. Upcoming tech earnings and any AI-related foreign policy developments will be particularly interesting to watch, as they could influence the broader trajectory of the sector.
We reccomend watching these numbers in our app very closely as we think the market could go fast up or down tomorrow. SPY/QQQ Net Options Sentiment could provide you the data you need to make a tough call quickly.
PORTFOLIO STRATEGY
This week is a bit different as we are mindful of the recent U.S. credit downgrade. We typically use Friday close price to enter/exit on Sundays. But in circumstances where a stock or the market moves after close we require by rule to hold our positions until we see live prices. However, we’ll be watching for compelling opportunities among the names listed below, keeping an eye out for promising position shifts as the market reacts. 3 longs, 2 shorts.
Long / Bull Moves
Long / Bull Moves - META, ARM and TQQQ holds
Watchlist - This is the list we will look to add from when prices go live.
UNH would be an interesting pick as a mean reverting play with good Net Options Sentiment with excellent Momentum. REGN is a solid diversified pick with great earnings power and good Momentum. TPL would seems like a great non-consensus energy pick with excellent Momentum and Tech Flow. AZO is always a solid choice with great earnings power and a smaller market cap. CW would be a good diversified choice with a smaller market cap and Industrials exposure.
Short / Bear Moves
Short / Bear Moves - GNTX and GRMN holds
Watchlist - This is the list we will look to add from when prices go live.
JNPR is a great Technology larger cap counterbalance with poor earnings power. FYBR also a decent choice with poor Net Options Sentiment. APPN is another good Technology choice if you’re looking for something smaller cap with bad Net Options. PARA seems like a decent Communication Services mid cap with poor earnings power. INFY is the largest market cap in the screener with good Downside Breakout. TS would be a good Energy counterbalance to TPL on the long side. FIBK would be another great divserifier in Financial Services with favorable Net Options.
Portfolio Summary
Long / Bull Moves - META, ARM and TQQQ holds
Short / Bear Moves - GNTX and GRMN holds
3 Longs: META, ARM and TQQQ
2 Shorts: GNTX and GRMN
Paid Investing Letter Bonus with Momentum Score
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