INTEREST-ING BULL BETS
08/09/26 Prospero.ai Investing - 343rd Edition (Weekend)
Please tell me you read last week’s letter!?Hopefully you did, because you would have been prepared for the rally we just experienced!
Here’s a direct quote from last week’s letter:
“Additionally some technical indicators like the McClellon Oscillator are showing tech to be near a technical bottom. There’s no guarantee, but it wouldn’t surprise me, if in the next several days we saw money flow back into tech. We’ll know if QQQ Net Option Sentiment turns bullish”
Two days after we sent you the letter, QQQ Net Options Sentiment jumped from 3 to a very bullish 44 and the market finished the week at all-time highs! Read the letter fam! And if I may say so, this week’s letter may be more important. Why? Because we think we might be on the verge of a bigger move higher. Let’s jump in, because something just happened that got our attention.
To be clear, we ARE NOT 100% certain about the market continuing higher. Nobody can be. But something happened on Friday, that when combined with our Net Options Sentiment turning bullish, makes us think there’s a legitimate possibility the market is setting up for something more powerful than a normal bounce. And one of the biggest clues didn’t come from stocks; it came from bonds.
On Friday, it looks as if someone made an $8 Billion dollar bet that interest rates are going LOWER.
And that’s a really big deal. Higher interest rates have been a weight around the neck of the stock market, particularly growth and technology stocks for a while now. Over the last couple of months (until last week), we saw the biggest decline in growth stocks since 2008. Why? The word on the street was that the Fed was going to RAISE interest rates by the end of the year.
Higher interest rates = Growth stocks drop
Why? Because when investors can earn an attractive return in safe government bonds, they’re less willing to pay up for huge valuations for companies whose biggest profits may still be years away. But what happens if that headwind suddenly starts moving in the opposite direction?
I’m glad you asked – because this weekend, one of my favorite follows on X (@VolumeLeaders) which tracks unusually large institutional block trades, identified a roughly $4.5 billion trade in $TLT (long-term Treasury ETF), and another $4.1 billion trade in $IEF (similar to $TLT), which holds 7-to-10-year Treasuries.
According to VolumeLeaders, these were the largest one-day trades in both ETF’s hitory! Here’s an important thing to remember, when huge block trades in the BILLIONS come across the tape, those trades aren’t made by retail traders like you and me, those are institutions making the moves; and Friday, we saw roughly $8.6 billion in institutional-sized Treasury activity in one day.
What does that mean? Lock in, because this gets a little complicated.
$TLT and $IEF hold government loans. They go up in price, typically when interest rates GO DOWN. So, the MOST likely reason institutions would pour $8.6 Billion into those etf’s, is because they think rates are about to go down. Below is a chart for TLT. Those circles represent the largest block of trades in TLT history!! We can’t know for certain, but it appears (and @volumeleaders agrees) that institutions are betting BIG MONEY that interest rates are about to be going down.
Now consider $TYO. TYO does the opposite. It only makes money if rates go up. Check out the TYO chart.
Look at the volume at the bottom of this pic. This is a very thinly traded ETF. But last Friday, A HUGE amount of volume (the most in that ETF’s history) hit the tape. Volume Leaders (who does this stuff everyday) translates these block trades as likely sells. Again, the most likely reason you would sell BILLIONS in $TYO, is because you’re convinced interest rates are about to be cut.
There are a couple of data points that make us think that’s the right way to read it.
1. Last week’s Non-Farm Payroll (jobs) report just came in way below expectations. You don’t raise rates into weakening jobs reports.
2. This is an interesting theory that institutions were making a concerted effort to move AI names down. If this is true it adds even more upward pressure to especially tech names.
3. Prospero’s Net Options Sentiment just made a very bullish turn.
Net Options Sentiment is one of Prospero’s primary measures of institutional positioning in the options market. Earlier this summer, SPY fell to 0 and stayed there. QQQ collapsed from the 40s into single digits. That was an unmistakably defensive shift. As of Friday’s close, QQQ NOS has surged back to 44, putting technology way above our bullish threshold again. What about SPY? SPY has gone from 0 to 24 in roughly two trading sessions. Twenty-four is still below our bullish line, but with SPY, the velocity of the move matters almost as much as the actual number. SPY is one of the most heavily used institutional hedging vehicles in the world, so its sentiment readings tend to be much more compressed than those of individual stocks.Put another way, the number is 24, but the bigger story is +24 points in two days.
That is a remarkable reversal in institutional options positioning, particularly when QQQ has already crossed back into bullish territory.
Prospero’s Dark Pool Ratings show QQQ and SPY as elevated as well, with QQQ around 81 and SPY around 77. Dark-pool activity alone doesn’t tell us whether institutions are buying or selling, but when it appears alongside improving prices and rapidly rising NOS, the combination becomes much more constructive.
Now we have several pieces moving in the same direction.
Is This How a Melt-Up Starts? Maybe…
Huge institutional-sized Treasury activity suggests large investors may be positioning for lower rates. QQQ NOS has moved from deeply bearish back above 40. SPY has jumped 24 points off the floor in a matter of days. Dark-pool activity is elevated. And technology, the part of the market that could benefit most from falling yield, is where institutional options positioning turned bullish first! That doesn’t mean a melt-up is coming. But the ingredients are becoming interesting.
A melt-up happens when investors who spent weeks protecting themselves from downside suddenly discover that the greater risk is being left behind. Portfolio managers who reduce exposure have to buy back in. Shorts cover. Hedgers remove protection. Cash comes off the sidelines. Rising prices create more buying, which pushes prices even higher. What catches our attention today is that institutional positioning isn’t euphoric. It appears to be moving rapidly from defensive toward bullish. That is exactly the kind of transition that can create a chase.
Two signals we’re watching heading into this week
1. QQQ is already bullish at 44; but SPY is only at 24.
Again, that’s a huge move, but historically, during big bull runs, both indexes Net Options Sentiment were in the bullish 40’s to 60’s. If we see QQQ and SPY Net Options Sentiment fall bearish, we should immediately turn risk off.
2. The CPI Inflation Report is released at 8:30 am EST on Wednesday August 12th.
IF inflation comes in cooling just enough to relieve the Fed, but not cooling enough to sound recession fears – THAT combined with a softening job market, could be the signal big money would need to go full risk-on and we could see tech really take off.
The Bottom Line
We are not saying a melt-up has begun or is about to. BUT, we are saying we may have caught the first whiff of one. If lower rates are about to remove one of the biggest headwinds facing growth stocks, investors who spent the last several weeks protecting themselves from downside may pile back in. We saw hints of it last week. If that continues, things could get very very interesting.
PERFORMANCE & WEEKLY RECAP
We pivoted quickly to take advantage of this week's momentum shift. Powered by strong calls like AXTI and OKLO, and our ability to nail quality shorts with a 60% win rate this week on our shorts while the SPY was up over 3%, we beat the market while successfully hedging our risk, and currently sit 8.5% above the market on an annualized basis, with a 57% win rate against SPY benchmarks.
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INTEREST-ING BULL BETS
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
Growth stocks led the way across all market sizes this week. Small Cap Growth topped the chart with a +6.0% gain, followed closely by Large Cap Growth at +5.0% and Mid Cap Growth at +3.5%. Value stocks also ended the week in positive territory, though at a quieter pace, with Small Cap Value and Large Cap Value both picking up +2.0%. Short-term trading near the end of the week built right on that trend, led by continued buying in Small Cap Growth (+2.5%) and Mid Cap Growth (+1.5%).
QQQ Net Options Sentiment has staged a strong breakout, crossing decisively above the Bull Line as institutional investors pull back their defensive hedges. This surge in options sentiment serves as a clear leading indicator, showing real buying interest underneath the recent stock rally. With options flow leaning heavily bullish, the tech index has built a much stronger foundation for higher prices. As long as these sentiment scores stay high, this move looks like a genuine market rally rather than a temporary short-term bounce.
SPY Net Options Sentiment has pushed out of its sideways baseline and is moving steadily higher. This upward trend shows that large funds are actively closing out their protective downside bets, opening the door for broader market participation. The positive shift in options positioning reinforces the price gains we are seeing across the board and removes a major drag on the market. Overall, stronger sentiment across the S&P 500 gives investors a far more stable backdrop heading forward.
SECTOR ANALYSIS
Looking at the sectors this week, large funds moved decisively back into Technology, which led the market with a strong 7.0% gain. We are also seeing a clear rotation into cyclical areas of the economy, with Materials adding 5.0% and Consumer Discretionary climbing 3.5%. On the other side of the trade, capital flowed out of Energy, pushing it lower by 3.5%, while Utilities dropped 1.5%. This setup shows investors are getting more comfortable taking on risk, stepping away from traditional defensive assets to capture upside in tech and consumer sectors.
PORTFOLIO STRATEGY & SETUP
It was a crazy ride last week, we saw the momentum shift and got very aggressive which worked in our favor. We made up some of the lost gains over the previous week, but NOS softened some as the week went on. We are still leaning bullish, and starting the week a slightly bigger portfolio of longs and shorts until we have follow through confirmation. We start the week with a portfolio of 9 longs and 6 shorts.
Long / Bull Moves – DY, PENG, NSIT Adds / RGLD, META, AXTI, TTMI, ASTS, OKLO Holds / APP, HOOD, CRWV Drops
Adds
DY was added for its high Net Ops and Upside in Industrials. PENG and NSIT were added for Small Cap exposure with high Net Ops and Momentum.
Holds
RGLD was held for its high Tech Flow and Net Ops, ASTS was held for its high Upside and Net Ops, META was held for its high Upside and Net Ops, AXTI was held for its high Upside and AI score, TTMI was held for high and Net Ops, and OKLO was held for its good Tech Flow and Net Ops.
Drops
APP was dropped for its low Tech Flow, HOOD was dropped for its dropping Net Ops and Momentum, and CRWV was dropped for its falling Upside and Momentum.
Short / Bear Moves – UAA, LYB, FTV Adds/ REZI, BHF, RYAAY Holds / LCII, ACIW, BLKB Drops
Adds
UAA was added for its low Net Ops and high Downside, LYB was added for low Net Ops, and FTV was added for its high downside and poor Momentum Score
Holds
REZI was held for its Low Momentum and Tech Flow, BHF was held for its single digit Net ops, and RYAAY was held for its low Momentum Score and Net Ops.
Drops
LCII was dropped for its rising Upside, and ACIW, BLKB were screened out by our filters.
Portfolio Summary
Long / Bull Moves – DY, PENG, NSIT Add/ ASTS, META, RGLD, AXTI, TTMI, OKLO holds/ APP, HOOD, CRWV drops
Short / Bear Moves – UAA, LYB, FTV adds / REZI, BHF, RYAAY holds / LCII, ACIW, BLKB drops
9 Longs: RGLD, META, AXTI, TTMI, OKLO, ASTS, DY, PENG, NSIT
6 Shorts: UAA, LYB, FTV, REZI, BHF, RYAAY
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