I SPY A BEAR TURN?
02/01/26 Prospero.ai Investing - 289th Edition (Weekend)
I want to begin by showing you a picture that might be a bit shocking. Don’t worry, it’s safe for work:
That’s Prospero’s SPY Net Options Sentiment from December 31st until now. What stands out to you? What stands out to me is the purple line. It’s flatlined at ZERO; and has been for a while now. Historically at Prospero, when either SPY or QQQ (or both) Net Options scores stays near or at 0 for extended periods of time, that can mean a couple of things.
First of all, it could mean there’s a correction coming. We saw that happen last February. SPY and QQQ scores combined scores dropped to 3 and stayed there right before the market fell off a cliff. We don’t THINK that’s what’s happening right now. At least not yet.
Second, (our primary theory), it can mean Big Money is aggressively hedging because of an ominous uncertainty facing the market. Have you noticed that the market is at all-time highs, but nobody’s celebrating? There seems to be an unsaid sense of foreboding that’s almost palpable. It reminds me of one particular football game back in my coaching days. We were playing a highly ranked team that was bigger, faster and honestly a lot better than us. We gameplanned well and in the first half caught them off guard and walked into halftime up by a touchdown. But inside the locker room, our coaches and players weren’t celebrating. Why? Because deep down inside we all knew that a reckoning was coming in the second half. Sure enough, we ended up losing by 20 points.
That’s exactly how the market feels right now. The scoreboard says we should be celebrating, but when you throw in tariffs, the Japan Carry trade, sticky inflation, Bitcoin plummeting, Political turmoil, Fed uncertainty, blah, blah, blah…something just feels “off”, like a reckoning could be just around the corner. Is that ominous feeling based on perception or reality? Nobody knows for sure, but the fact is that Big Money is still in this market, but they are aggressively positioning for a downturn.
Let’s unpack WHY they might be so aggressively hedged.
REASON #1 Capital Protection: A LOT of money has been made over the last three years and it looks like Big Money is in capital protection mode. In other words, the pros have stopped asking, “How much more can we make?” and started asking, “How do we protect what we’ve already made?”
REASON #2 When VIX is Low = Puts are Cheap: The VIX (measurement of volatility) has been fairly stable. As a result, SPY puts are cheaper than they would normally be if the VIX were spiking. Big money is buying them while they’re less expensive.
REASON #3 Late Stage Selling Behavior: Have you noticed that every single time the market pops or rallies, it immediately sells off? It’s becoming more and more obvious that we are no longer in a “buy the dip” but rather a “sell the rip” kind of market. That is “late stage bull market” behavior.
That brings us to our most important subject. How do we approach the coming week?
First, if you’re sitting on a pile of unrealized gains, now is the time to do some trimming. We don’t believe that a crash is imminent, but anytime SPY Net Ops stays at 0 you have to be on guard. That’s not fear; that’s wisdom.
Second, respect how fast the market mood can change. Inflation headlines, the Fed, politics, shutdown noise; any one of those can flip the market on a dime. Right now, the smartest move is fewer and smarter trades. Look for good entries that are combined with good Net Ops and Upside scores. Then don’t go crazy with your sizing. No leverage. Period.
And here’s the big mindset shift: you don’t have to choose between “everything’s fine” and “the sky is falling.” This is one of those seasons where the wisest people are okay being a little early on defense. The goal isn’t to call the top. The goal is to still be standing if this really does turn out to be the most carefully hedged set of all-time highs we’ve ever seen. What could change our defensive stance? If SPY and Net Options turn bullish and stay there. Then we might be in for some fun. But until then, let’s hear from the man himself…
A WORD FROM OUR CEO
You’ve probably seen us yammering on about process a bunch over the years. We took a hit this week and we were both right and wrong about our risk management. We were concerned about how low the combined QQQ/SPY Net Options Sentiment were on Thursday. We correctly moved away from our growth names in Tech. We moved into what had been a much more solid Sector in recent Bear runs, Materials. But we picked a VERY bad day to do it. We did know the risks as we had actually outlined them earlier that week. But that is the type of choices you get in tough markets, picking between imperfect options. Our first month was a strong one overall, our paper trading portfolio is 94% above the market on an annualized basis, with a 51% win rate against SPY benchmarks.
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I SPY A BEAR TURN?
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
Large Cap Value surprisingly finished the week off stronger than the rest of the style boxes, despite some great Large Cap Growth earnings, must be that SaaS sell off. Small Cap Growth surprisingly had a larger than expected pull back, assuming this is due to the reaction of the new Fed Chair with risk assets suffering the most.
QQQ NOS has pulled back meaningfully since midweek, and the fact that even strong big‑tech earnings failed to lift sentiment is telling. It’s another clear indication that the market’s tone is skewing more bearish for now.
SECTOR ANALYSIS
Materials are seeing the pullback we anticipated, amplified by a sharp selloff in gold and silver that’s weighing on the entire complex. Healthcare also rolled over, with UnitedHealth (UNH), the sector’s largest weight, dropping hard on disappointing earnings and the Medicare Advantage proposal. Its decline dragged the broader group lower. Tech sold off as well, Microsoft posted a headline beat but still fell 6–11% as investors focused on slowing Azure growth and rising AI‑related capex, which pressured sentiment across software broadly. Energy remains the lone bright spot, supported by rising crude prices as geopolitical tensions with Iran continue to escalate.
PORTFOLIO STRATEGY
With both SPY and QQQ NOS flashing mildly bearish signals, yet offering little clarity on longer‑term direction, we’re tightening up the book heading into the week. We’ll stick to our highest‑conviction positions and maintain a net‑short stance to better align with the market’s current tone. 2 Longs, 3 Shorts.
Long / Bull Moves – META and ASTS holds / TPL, MELI, IREN, SCCO, APP and TMC drops
Holds
META remains an easy hold at the top of our screener after a great earnings still with perfect NOS. We still like ASTS with perfect Upside and strong Tech Flow and Net Options Sentiment.
Drops
TPL, MELI and IREN were all dropped as they didn’t have any standout metrics this week. SCCO, APP and TMC were dropped as they placed too low this week.
Short / Bear Moves – ROKU add / CALX and IONQ holds / KSS, APPN, INTU, HPQ, ARM, ARES, CRM and NXST drops
Adds
ROKU was added as it had favorably low Momentum and Net Options.
Holds
We liked both CALX and IONQ for Technology exposure this week with low Momentum and poor earnings power.
Drops
KSS was dropped as we didn’t have any use for the exposure it provided in our portfolio. Similar story with APPN. INTU, HPQ, ARM, ARES, CRM and NXST were all dropped as they performed poorly in our screener.
Portfolio Summary
Long / Bull Moves – META and ASTS holds / TPL, MELI, IREN, SCCO, APP and TMC drops
Short / Bear Moves – ROKU add / CALX and IONQ holds / KSS, APPN, INTU, HPQ, ARM, ARES, CRM and NXST drops
2 Longs: META and ASTS
3 Shorts: ROKU, CALX and IONQ
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