MAGIC VS. METRICS
10/6/24 Prospero.Ai Investing (159th) Edition (Weekend)
There was a movie released in 2006 called "The Prestige" starring Hugh Jackman and Christian Bale. The plot of the movie centers around two magicians (Jackman & Bale) in late 19th century London, who found themselves in an intense rivalry to prove to everyone who was better. As a result, they were constantly trying to outdo one another, engaging in increasingly elaborate tricks and illusions. Ultimately, the film reveals that what seemed "magical" to the everyday person in the audience, was nothing more than the result of meticulous planning, scientific principles and willingness to sacrifice everything for greatness.
We chose to write about this subject on the back of an article our CEO wrote in Fast Company - Should you be worried about AI? Many think we are in the midst of an industrial revolution, others a bubble. We know AI can feel like a lot to sort through, especially if you are not in the Tech space. But if you avoid pitfalls like wanting hard things to be easy or solved for you “magically” you can logic your way through. We built Prospero with this idea in mind, metrics over magic. So here is a crash course in making this kind of evaluation…
We built Prospero to logically disinguish itself from so many stock analysis/wealth management, AI startups out there… They're making promises that they simply can't deliver. What do I mean? Well, there are several AI wealth management start ups out there that promise you that if you'll just give them your money, they'll beat the Bridgewaters of the world. But in reality, they're promising the miraculous, the magical, but at the end of the day, it's just an illusion. Why? Start-up wealth management companies managing even hundreds of millions of dollars can't really compete against behemoths of Wall Street managing hundreds of Billions of dollars. For example, imagine that a massive institution bought a huge amount of Call Options on TSLA. The're betting the stock will go up. They make a lot of money if TSLA goes up! So what do they do? They could potentially spend hundreds of millions of dollars actually buying TSLA stock, pushing the stock go up and making their Calls more profitable. Not to mention the years these institutions had to build superior historical data sets built on billions of dollars in alternative data and engineering spend. A start-up can't compete head on with that. But at Prospero, we don't try to compete AGAINST Wall Street, our product shines a light on what Wall Street is doing, and as our CEO George Kailas says: "We stand on the shoulders of Giants". Prospero's signals would show us through Net Options Sentiment going up, that a massive amount of Calls on TSLA were being bought. We could then potentially get in on the move… Before or during the institution buying the stock to help ensure their more profitible (higher leverage) call options increase in value. We have seen evidence of this happening before with TSLA and we won big a few times in 2023.
Think of it this way. If the massive institutions of the world are like a big ocean wave, what Prospero's technology allows us to do, is to see the wave coming, then surf the waves the big wave makers create! How is that different from most AI startups? They're trying to create their own waves, and right now at least, that's impossible.
So, is it magic or an illusion that allows Prospero's signals to catch that wave? No. Just like the movie, it's nothing more than the result of our team's meticulous planning, scientific principles and willingness to sacrifice everything for greatness. And by the way, we're so grateful for each of you that are a part of our Prospero Family, now, let's go surfing together.
A WORD FROM OUR CEO
Due to the volatility we have tried to remain well hedged and ending the week near we we bagan beating the S&P 500 by 77% annualized, with a win rate of 61% against SPY benchmarks.
To help newer readers get up to speed linking our short intro + learning videos.
Normal streams this week! Monday 10/7 at 11 AM EST and Wednesday 10/9 at 3PM EST.
Don’t have our app yet? Use it to track your investments with Prospero’s proprietary AI tech.
MAGIC VS. METRICS
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
Check out the Cap/Value Analysis Table above. As you can see, we had a rally last Friday as a result of the strong job numbers that came in. Particularly strong was Small Caps. You get the sense that if we get definitive proof the economy is ok, then small caps will run. But it’s been one step forward, two steps back. Until after the election, expect more volatility and uncertainty. We will account for this strength in Small Caps by diversifying our portfolio diversity with respect to Market Cap.
NET OPTIONS SENTIMENT
SPY and QQQ Net Options Sentiment > 40 = Bullish < 30 = Bearish.
Check out the QQQ Net Options chart below. At the end of last week, we saw the slow downtrend stop, reverse upward and then stabilize. This is a good and bullish short term sign. But as always, things can change in a hurry.
Check out the SPY Net Options Chart above. SPY numbers have been a bit softer than QQQ, but finally have crossed into a firmly bullish pattern. But, and we’re going to keep saying this until it no longer applies…things can turn on a dime in this market. We will dip our toes into a more Bullish stance, but also be ready to pivot.
SECTOR ANALYSIS
Check out the Sector analysis table above. Couple of things to point out here. When you look at the 1 Month numbers, Technology and Communications had surprisingly good numbers. I say surprising because historically, September is typically a down month for stocks in general. But this last month was actually pretty solid. What I personally find interesting is that our QQQ Net Options numbers were higher than SPY all month. Well, the proof of that playing out is right there on the table. Another point of interest is Consumer Discretionary. It was the #2 ranked sector behind Technology. It even had a strong day on Friday during the rally. This could be a result of the market beginning to see a glimmer of hope we might skirt a recession. For the week, energy did amazing on the heels of turmoil in the Middle East. Whether that strength will continue if tensions eased remains to be seen. Real Estate is in a bit of a downswing so we will target that for one of our picks.
PORTFOLIO STRATEGY
We are still in the same place as the last two weeks, overall Bullish but conservative around recent and expected volatility. Since we are focusing on a little more Market Cap diversity we will run a slightly larger portfolio. 7 Longs and 5 Shorts.
Long / Bull Moves
Long / Bull Moves - FANG, AVAV adds / META, APO, LMT, APP and PDD holds / XOM and NVDA drops
Adds
FANG was an easy add as Energy does not typically crack the top 10 of our Screener. Similarly AVAV at 28 is great performance in the Screener for a smaller Cap company.
Holds
META and APO were easy holds given their Screener performance. LMT we held over PWR because we see it as a hedge for any further escalations in the Middle East. APP was a close call with AVGO but despite it being filtered out we held it due to the fact that it diversified us out of Mega Caps a bit more. PDD, we wanted to hold because it / China has been on a nice run and we will see if that continues. This is a stock we will drop quickly if it doesn’t start the week off well.
Drops
NVDA and XOM were dropped because their Screener performance was not good enough.
Short / Bear Moves
Short / Bear Moves - BXMT, BTI, BCH, and CHD adds / KBH hold / NAVI, MKC, CUBE, SWKS and LNC drops
Adds
BXMT was an easy add as the top Real Estate Stock. The others were easy adds as diversified largest Cap stocks that looked good in the Screener. Other than PBR which was in an Sector we were looking to avoid.
Holds
KBH was an easy hold due to it being one of largest Cap stocks near the top of our Screener.
Drops
CUBE, SWKS and LNC were dropped due to poor Screener performance. MKC was dropped as CHD edged it out sligghly in the Screener.
Portfolio Summary
Long / Bull Moves - FANG, AVAV adds / META, APO, LMT, APP and PDD holds / XOM and NVDA drops
Short / Bear Moves - BXMT, BTI, BCH, and CHD adds / KBH hold / NAVI, MKC, CUBE, SWKS and LNC drops
7 Longs: FANG, AVAV, META, LMT, APP, PDD, APO
5 Shorts: KBH, BXMT, BTI, BCH, and CHD