Must read Macro setup
10/22/23 Prospero.Ai Investing (68th) Edition (Weekend)
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Must read Macro setup. Outline:
Market Update
QQQ and SPY Net Options Sentiment and Portfolio Allocation
Portfolio Macro Strategy
How we are approaching the number of longs/shorts and sectors
Longs
Adds —> No Keeps —> Drops
Shorts
Adds —> Keeps —> Drops
Portfolio Allocation Notes
The market was extremely volatile this week. How we added upside, while limiting our risk.
Market Update
For Tech: QQQ Net Options Sentiment > 30 = Bullish. < 20 = Bearish.
For Non-Tech: SPY Net Options Sentiment > 20 = Bullish. < 10 = Bearish.
QQQ returned -2.92% this week vs -2.39% for SPY. Our signals were all over and out in front of this Bear move. And we are seeing other concerning Macro signs, co-signaling a potential bigger move down.
Both of these indexes are painting a Bearish picture. If that weren’t bad enough, we’re also seeing a very negative trend:
This is a big wow! In two days, we have an almost 20% LESS chance of a rate hike over the next 3 meetings…yet the market is still down. This should be a Bullish signal, because it indicates less chance of a hike. The only thing that makes sense to me here, is that Wall St. is expecting a painful earnings season, lowering the probability of a hike, while at the same time bringing a hurt to the markets.
This level of movement in predictions is setting this week up for a potentially huge move in either direction which we will discuss on our YouTube livestream is tomorrow 10/23 at 11 AM EST and another Wednesday 10/25 at 3 PM. To get calendar invites for them: sign-up link.
Given this setup, we’re adjusting the SPY Bull level, as only clearing 15 Net Options sentiment, which would be a major signal this momentum has turned.
For Tech: QQQ Net Options Sentiment > 30 = Bullish < 20 = Bearish.
For Non-Tech: SPY Net Options Sentiment > 15 = Bullish < 10 = Bearish.
Portfolio Macro Strategy
We are obviously looking at a confluence of Bear signals right now so we will go 5 Bears to 1 Bull.
Long / Bull Adds - Link to Below Picture
LLY is our only add. We considered not adding anything this week, but since it is number 1 in the screener and the technicals are set up well, we feel good about it as our lone Bull.
Long / Bull Drops
Dropping META as a Bull, as it was filtered out of the above screen and technicals have soured. Covered 8/27-10/20 it finished +8.11% and a Win, Beating the SPY benchmark by 12.38%.
Dropping AZO as a Bull because the technicals turned bad. Covered 10/1-10/20 it finished -2.03% and a Loss, Losing to the SPY benchmark by .55%.
Dropping MOH as a Bull really just because LLY is better in the screener and MOCH is in the same Sector. Covered 10/15-10/20 it finished -.01% and a Win, Beating the SPY benchmark by 2.38%.
Short / Bear Adds - Link to Below Picture
Nothing complicated here, we’re grabbing Bears that are highest in the screener with technicals that match. At the same time, we’re not doubling up on any Sector a risk control mechanism to go along with a 5 to 1 Bear to Bull.
As a warning BPMC is reporting 10/26 and we are highly likely to close out of the position in the 10/25 letter, but it will be behind our paywall if we do.
Short / Bear Keeps
NSA is a keep and returned -2.72% vs -2.39% for the SPY. It was kept as the highest Real Estate in our Screener with a good technical setup.
Short / Bear Drops
Dropping WISH as a Bear, as it was filtered out of the above screen. Covered 9/20-10/20 and it finished -8.47% and a Win, Beating the SPY benchmark by 4.49%.
Dropping PEGA as a Bear, as it was filtered out of the above screen. Covered 10/15-10/20 and it finished -2.61% and a Win, Beating the SPY benchmark by .22%.
Dropping IE as a Bear, as it was filtered out of the above screen. Covered 10/15-10/20 and it finished 7.76% and a Loss, Losing to the SPY benchmark by .22%. As a little extra analysis here, the materials Sector got very hot this past Monday. This happens, and is exactly why we diversify Sectors.
Portfolio Allocation Notes
1 Long: LLY
5 Shorts: IRBT, FRHC, BPMC, MGEE, NSA
With the Macro trend we picked up, we are leaning towards a heavy Bear makeup, but making sure to diversify Sectors to reduce our risk to the downside.