MARKET HAS GAMOPHOBIA?
5/12/24 Prospero.Ai Investing (120th) Edition (Weekend)
When we think about how the market has behaved over the last couple of months, a certain word comes to mind: “Gamophobia”.
No, that’s not the fear of becoming a gamer or option gamma. It actually means “fear of commitment”. Maybe you experienced gamophobia before you got married or signed that big contract. It’s a real fear that many people experience. When you look at the stock market over the last couple of months, you see that same lack of commitment. The uncertainty of the market’s direction is palpable. One day it’s up, one day it's down and it seemingly can’t “commit” to one direction or another. In this letter, we’re going to explain why we think the market is acting this way, and how we’re going to prepare for it. But first, a word from our CEO George Kailas….
A WORD FROM OUR CEO
Prospero got some press coverage this past week in New York Weekly and Daily Invest News plus our CEO appeared on Fox 5 DC, we will share that video when it goes live!
It was a volatile week but ended in line with our expectations and we are beating the S&P 500 by 87% annualized and a win rate of 63% against that benchmark this year.
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MARKET HAS GAMOPHOBIA?
A Word From Our CEO
Prospero’s CEO George Kailas, gives us his thoughts on the Market
Market/Macro Update w/ Special 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
Last week’s Net Options Sentiment levels from the 5/5 letter:
SPY and QQQ Net Options Sentiment > 35 = Bullish < 25 = Bearish.
MARKET/MACRO UPDATE
Last Sunday in our letter we were growing increasingly bullish. The week before, Large Cap Growth had a great week. Small Cap Growth was finally showing signs of life. Communications and Tech were creeping into the green and our QQQ Net Options Sentiment Numbers finally came out of the doldrums. But something interesting happened as the market rallied. The S&P Fear and Greed index stayed firmly in the “FEAR” zone. Pretty weird that the market was rallying, but people were afraid. Then, sure enough, the rally fizzled and this week really underwhelmed us. It wasn’t a bad week in the market, but not nearly as bullish in the areas we thought would be bullish. Small Cap Growth had a tough week. Utilities and Materials (stocks that do well in a recession) outperformed Tech and Communications. Large Cap Growth was outperformed by Large Cap Value! WHY CAN’T THE MARKET MAKE UP ITS MIND?! Over the last couple of weeks, we’ve talked at length about the market’s uncertainty over A.I; so I want to give you what we think is the primary reason why this market has fear of commitment and why it’s been so difficult to trade.
Historic Bullishness With A Looming Fear of Recession:
Let’s start with what I mean by Historic Bullishness. You’ve heard of the phrase “Sell in May and go away” The idea is that May is a bad time for stocks. But not in election years. In election years, the S&P 500 is up 75% of the time during June through August. Let me give you one more (there are several bullish theories about the market now). The New York Stock Exchange just hit its first all-time high since 2009. Every single time that’s happened in the past, it leads to the S&P 500 also reaching an all time high afterwards. Seems pretty bullish right? Not so fast.
In the background of all this, is a Looming Fear of Recession. Last week, unemployment numbers came in higher than expected. That caused a rally because it meant a rate cut might be coming sooner rather than later. But then it dawned on everybody that higher unemployment isn’t a good thing. The economy is slowing. We see this being played out in several places. Consumer Spending stocks like Shopify, Uber and Starbucks had bad earnings. Our CEO George Kailas did some of his own research on Amazon and discovered that when you take away their Cloud (tech) business, the consumer spending part of their business only grew by 11.8% over the last year. That’s historically underwhelming.
Bottom line, the market is uncertain because both Bulls and Bears can make compelling arguments about the future of the market. So….How are we going to trade it? The answer, is we’re going to diversify and be defensive until the market gets over its “fear of commitment”. This is also especially important considering the PPI and CPI reports will be delivered on Tuesday and Wednesday. Both of which have the ability to sway market sentiment. We’ll give the specifics of what our strategy will look like later in the letter.
CAP/VALUE ANALYSIS
See the chart above. Last week we got excited because Small Cap Growth showed signs of strengthening. Why does that excite us? Because Large Cap Growth stocks have driven this recent Bull Market while Small Caps have underperformed at historic levels. If Small Cap Growth catches fire, it would be a highly positive sign that people were willing to pay for Growth outside of AI. That would provide mean a show of strength to the market as a whole. But, this last week, Small and Large Cap Growth both underperformed Value Stocks! AGAIN. People run to value stocks when they fear the Bears. That’s how uncertain this market has been. One week it looks like a growth rally. The next week there’s a flight to safety. As a result, we are going to diversify our portfolio and look for strength, regardless of the sector. In other words, we’re going to play defense until we are more confident of the market’s direction. Let me give you one example. George (our CEO) made an interesting and unlikely pick last week. The company is called JLL. It’s a real estate company. For those that have been reading the letter you know that the Real Estate sector tends to run low in our key options metrics like Upside and Net Options Sentiment because it isn’t a Sector with a lot of fast Growth / speculation. And even though Real Estate is still underperforming, JLL is showing signs of strength in our numbers relative to its Sector. Its Net Options Sentiment hit hit 80 this week a VERY high number for a Real Estate stock. In a normal Bull Market Tech driven rally, you would leave a stock in a beaten up sector alone. But our #1 priority is diversification. Hopefully it will pay off!
NET OPTIONS SENTIMENT
See the chart below. QQQ sentiment further proves our thesis that the market can’t make up its mind. We were encouraged to see QQQ Net Options sentiment begin an upward trend; but look at the up and down choppiness of May 6th-10th!! It looks more like an ECG Heart Monitor than it does a stock market chart. We’ll be watching the numbers closely this week to see if a trend emerges.
See the chart above. We’re finally seeing some real strength in our SPY Net Options Sentiment. It went all the way to 0 in the middle of April, then jumped into the 40’s (bullish zone) by the end of that month. Now in May, we’ve seen the same pattern. It dropped hard at the beginning of the month; then it shot straight up and has been on a healthier trend than the choppiness of QQQ. This is one of the primary reasons we’re going to be looking to diversify our portfolio into safer Sectors until the market makes up its mind.
SPY and QQQ Net Options Sentiment > 35 = Bullish < 25 = Bearish.
SECTOR ANALYSIS
Take a look at our Sector analysis chart. Some important points:
1. Energy was up and down last week. But the reality is that it had a rough month compared to the previous.
2. Utilities has been in a TEAR but it is perhaps slowing down. We will continue to look there, as well as financials (who've been showing signs of life) as a part of our defensive/diversifying strategy.
3. Consumer Discretionary looks like it could be a great short target as the worst performing Sector last week. This is the Sector we are most Bearish on overall due to Macro forces on consumer spending. This presents an opportunity where our view matches the price movement!
PORTFOLIO STRATEGY
Due to our defensive strategy, we are shrinking the portfolio as well as focusing our upside and downside into specific places to start the week. We have 6 longs and 5 shorts. Our longs are concentrated in more stable Sectors. We chose 2 in Tech, which we feel gives us access to the upside if the week starts Bullish on Tech / AI again. On the short / Bear side, we have 2 Consumer Cyclical companies which have great short- term return potential if the downward trend continues in that Sector.
Long / Bull Moves - Link to Below Picture
Long / Bull Moves - UNH, BLK adds / MSFT, COST, JLL, NVDA holds / MELI, CEG, BIDU, SMCI, META, SRPT drops
Adds
UNH is an example of how we played this week more defensively. LLY and SRPT could both have cases to be made as picks above UNH, but it is a stable, more established company with Stronger technicals. Ultimately, we felt better about that, considering the theme of this week, rather than the other two names. Similarly we have seen BLK consistently perform as our best Financial Sector stock this year; and that Sector has been one of the stronger Sectors lately. When you add on top of that, its strong technicals, it was an obvious choice.
Holds
MSFT got the slight edge over AVGO, even though they are close with a slight edge to AVGO in the screener. MSFT looks better in Net Options Sentiment, and ended the week at a 2 week high for that signal which made us more comfortable short term. COST and JLL were obvious diversification picks as the strongest stocks in their Sectors. They have Bullish technicals to match. NVDA again got filtered out due to an elevated (75) Dark Pool rating. However, it’s strong technicals and #1 Screener rank, make the upside worth the risk.
Drops
MELI, CEG and SMCI were dropped due to a poor technicals; and CEG also had a downward trend in Net Options Sentiment last week. That is why META was dropped. It had a bad trend in Net Options Sentiment, as well as elevated (76) Short Pressure, which is a bigger concern than NVDA’s elevated Dark Pool. SRPT got beat out by UNH. BIDU was the toughest call because the technicals recently started to turn bullish, but China stocks can be highly volatile, and that doesn’t fit with our defensive theme.
Short / Bear Moves - Link to Below Picture
Short / Bear Moves - MNRO, WEN adds / NEU, XRX, BXMT hold / ACI, LPL, KSS, LCII, VRNS drops
Adds
These were the best 2 Bears in the Sector. We were targeting Consumer Cyclical, but we also wanted to ensure they were in different businesses. MNRO is an automotive industry stock, and WEN (Wendy’s) is of course fast food.
Holds
NEU and BXMT continued to have good setups in technicals and our screener. XRX was a tougher call, but we wanted to have a hedge on the Tech side to our exposure there, and thought it was our best option.
Drops
ACI was dropped due to a “Buy” in technicals. KSS was a close call, but WEN just looked better all around as our 2nd Consumer Cyclical short. LCII had bad screener performance and technicals; and VRNS just a bad screener performance. LPL was a tough drop, but seeing as we are looking for upside in Tech, we didn’t want to have 2 long and 2 short in that Sector.
Portfolio Allocation
8 Longs: MSFT, COST, NVDA, UNH, BLK, JLL
6 Shorts: NEU, BXMT, XRX, MNRO, WEN