Not All Heroes Wear Capes (NVDA)
2/25/24 Prospero.Ai Investing (100th) Edition (Weekend)
We made it to 100 letters! Thanks for everyone that has spread the word helped us grow.
Prospero continues to have superior performance for the year. We are currently beating the S&P 500 by 285% with a win rate of 74% against that benchmark.
For new readers linking our short intro + learning videos. I know we have some new readers in Mexico who are curious on how to buy US stocks. I did some research and Interactive Brokers would be my recommendation for trading US stocks in Mexico.
Last week was a great example of how we used Prospero’s signals what moves to access upside while limiting risk. Last week’s letter, entitled “On the Lam”, was a play on words to describe our decision to move into LRCX (Lam Research).
LRCX (Lam Research) is an add…When we dug in, it was an easy decision. The value pick for P/E gives an edge to LRCX (27 2023 P/E and 32 2024) over SMCI (74 2023 P/E and 41 2024)
We made the value and even more broadly “stability” case for LRCX over SMCI because SMCI’s high Short Pressure (82) and Dark Pool (90) signals painted a clear picture of high risk vs LRCX (58, 53 respectively) showed us a way to access upside AND mitigate risk. There was little doubt (at least in our minds) in this environment that NVDA would bend the market to its will one way or the other. LRCX offered an alternative that was close enough to NVDA’s business that it would do well with a good NVDA report but far enough away to mitigate risk.
NVDA beat and it is a fair question we’ve been asked is, you bet on SMCI and META earnings because of AI with lower Net Options Sentiment ratings, so why the caution for NVDA given it has been fixed at the perfect 100 score for weeks? That is why we think this is such a good risk control lesson. META had 100 Upside, SMCI 78 when we bet earnings. NVDA 65. That is simply not enough confidence from institutions in the long term options markets for our risk profile! So let’s now tell the story of why we picked LRCX to start the week and added NVDA as a subsequent or continuation bet on our thesis.
This was one of the sharpest up and down weeks we can remember, IE a very hard one to make money or even minimize losses if you bet wrong. The above is a great example of how you can use our signals to protect your money while accessing upside. Just for the day on 02/22 NVDA (+16.40%) SMCI (+32.87%) LRCX (+4.70%) posted some crazy returns! Especially considering SMCI’s price increased based on NVDA’s earnings, proving just how prophetic our dark pool warning was as SMCI was also down 11.84% the following day while NVDA was up .36%. So what did we do and why did we do it? Our Dark Pool and Short Pressure ratings correctly identified that risk (and the associated volatility) was too high for SMCI. And because of LRCX’s lower levels in these signals, it was the best value play. The other stocks might have had bigger gains, but it also came with the potential of bigger losses and we wanted to play it safe. For example, if SMCI and NVDA were up ~4-7X more than LRCX on good news, it is fair to think that they could have been down that much if not more on bad news. That is the core of what we teach at Prospero, plenty of money to be made on the safer bet! We’d rather put you in something that gains 5% in a day because the loss potential was likely similar vs something that gains 32% also has the potential to lose that much quickly! And when we saw the ground swelling for NVDA the morning after earnings, that looked like a mighty safe bet too.
As a last comment on why we bet on NVDA after earnings. Those that read me for a while know I rarely speak like this but only TSLA and NVDA for certain STRONG sprints can maintain a 100 Net Options Sentiment for that long. NVDA has held that crown for weeks, while the low Upside was a non-starter for a bet the magic of our signals is their ability to situate complex situations to be more simple. The CEO (Huang) could have said something to scare people, no doubt, as he did last quarter but once that didn’t happen and they posted an insane 256% Y/Y revenue gain even a 10% pre-market gain (when we opened our position) seemed like a safe a bet as you can get on a stock you know is going to be absolutely lighting up social media when the market opened. If you followed this and please ask me questions if you didn’t, you just leveled up big time as a tech investor.
Back to the regular livestream times this week today 2/26 at 11 AM EST and Wednesday 2/28 at 3 PM EST. Simulcast from our X/Twitter page. Back to 2 next week!
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Tech troubles, on the LAM (Research), Outline:
Market/Macro Update
QQQ and SPY Net Options Sentiment
Sector Update / Portfolio Strategy
Now the Sector analysis will be roped into our allocation!
Longs
Adds —> Keeps —> Drops
Shorts
Adds —> Keeps —> Drops
Portfolio Summary
Last week’s Net Options Sentiment levels from the 2/18 letter:
For Tech: QQQ Net Options Sentiment > 40 = Bullish. < 30 = Bearish.
For Non-Tech: SPY Net Options Sentiment > 40 = Bullish. < 30 = Bearish.
QQQ returned 1.44% this week vs 1.67% for SPY.
If you’ve ever seen the movie, or read the comic book “Superman”, you can be fairly certain how the plot will play out. A villain comes in and causes some kind of trauma to the world. Everybody is freaking out. Then, when all hope seems lost, triumphant music begins to play and the Man of Steel comes flying in to save the day. It’s a roller coaster of emotions for sure. Well, this week in the market played out just like a good superhero movie. On Monday of last week, our QQQ Net Options Sentiment began to sour. By Tuesday the January CPI report came in hot, and stocks had their worst single day performance in almost a year. As a result, our QQQ numbers dropped into the mid-30’s (the lowest we’d seen in quite some time). The seemingly indestructible SMCI, took a nosedive and on Tuesday losing a massive percentage of its gains. In response, we released a letter called “Bear Attack”. In our biggest shift in the history of our company, we dropped 12 longs and added 12 shorts. Things were looking ominous to say the least. The market traded sideways on Wednesday until after the bell, when NVDA released its earnings. Then, somewhere in the heavens, triumphant music began to play. Loudly. NVDA literally smashed earnings expectations on every level. In their earnings call, the only thing that even HINTED at bearishness, was the CEO saying that they were having a hard time keeping up with the overwhelming demand for their products. Not all heroes wear capes, but on Wednesday, NVDA did. And make no mistake, they saved the day. As the call ended, things turned around in a hurry. On Thursday the bullish momentum came back in full force and we were out there snagging tech profits pre-market! NVDA shorts lost $3 Billion in the rally. Our QQQ Net Options Sentiment jumped back into the high 40’s and stayed that way through the end of the week. But despite the rally questions remain. Signs of a possible storm are looming on the horizon. Was Thursday and Friday’s momentum a sign that the bullish trend will continue? Or was the bullish jump the last roars of a bull market that’s long overdue for a downsizing. We will talk more about those (possible) looming storm clouds in the Sector analysis.
SPY Net Options Sentiment is painting a much rosier picture but as we will see in the next section that makes sense. Energy and Utilities look like they might be waking up as we’ve been pointing to in our last few letters so we will adjust accordingly as we examine Sector movements.
For Tech: QQQ Net Options Sentiment > 40 = Bullish < 30= Bearish.
For Non-Tech: SPY Net Options Sentiment > 40 = Bullish < 30 = Bearish.
Sector Analysis / Portfolio Macro Strategy
For those of you who are beginner or intermediate investors, it’s important to understand where to focus on the Sector Analysis Graph. To understand how trends might be changing, we like to focus more on the month, week and day. In light of that, take a look at two of the sectors that have been red hot during the last year, Technology and Communications. What do you notice about their month? There has been a pretty dramatic change of their numbers from a month ago until now. What do we learn from this? The market is shifting away (at least from a Sector perspective) from the primary drivers of this latest Bull run. This could be a healthy sign of market breadth expanding, or an ominous sign, that what has been driving the market over the last year is losing serious steam.
In the beginning of the letter, we talked about potential storm clouds looming on the horizon. Here are a few. On Feb 22nd Fed Governor Chris Waller suggested that the Fed would be watching the data to evaluate whether rate cuts were necessary any time soon! Also, CEO’s are selling stock at an alarming pace. Jeff Bezos has sold billions of AMZN stock. JP Morgan’s Jamie Dimond just sold his company stock for the first time ever, to the tune of $150 million. Mark Zuckerberg has been selling now for weeks. Warren Buffett is sitting on a record, $167 Billion in cash. These are smart people. At the very least, they are being conservative after a good and profitable run. Maybe Zack’s just building his bunker for the fun of it! But at worst, tough times are ahead. Regardless, it’s important to not get over-extended in this type of environment. On a positive note, Energy had a great month. It led as a sector for the first time in a long time. It’s also worth noting that while sitting on a mountain of cash, Warren Buffet has been buying two oil companies (OXY, CVX) over the last two quarters. If this trend continues, we’ll be looking at our screener for potential adds in the days to come.
As we did last week we will go 5 longs and 4 shorts. The overall Bull trend still can’t be ignored but there are mounting sings of a Bear attack that could send the market down quickly. That is why above all we advocate for conservative portfolio constructions like this right now. We are managing risk even further by loading up on safer Sectors!
Long / Bull Adds - Link to Below Picture
The Sector data is indicating that to the extent it is available to you, you want to flow into the basics for our economy (Basic materials, Industrials, Energy and to a lesser extent Healthcare but that spend tends to be stable too) TRGP is the best looking Energy Sector stock in our signals, possessing a great Net Options Sentiment for an energy stock (75) and a nice trend of higher lows to end the week.
Long / Bull Keeps
ETN is a keep, and returned 2.67% vs 1.67% SPY benchmark. We’ve been holding for a bit and we think it might be ready to make a bigger Bull move soon.
EXP is a keep, and returned .88% vs 1.67% SPY benchmark. Before the year started we said Basic Materials would likely be our favorite Sector this year and that is looking to be like a good prediction all around.
LLY is a keep, and returned -1.60% vs 1.67% SPY benchmark. We think all growth stocks may get hit and at a 61 2024 P/E it is definitely growth oriented as it is trading many times above earnings. So we will exit quickly if the week starts out bad but we have faith in long term so it will only be a matter of time until we are back.
LRCX is a keep, and returned .27% vs 1.67% SPY benchmark. Technicals look good despite the downward move for the Technology Sector and that keeps them in, in a close call.
Long / Bull Drops
META is a very tough drop again this time the Short Pressure isn’t even high enough to justify the drop, we are just concerned about a correction in the Communications Sector. Covered 2/21-2/23 and it finished +1.17% and a Win, Beating the SPY benchmark by .4%.
MELI is a drop because it got hit way too hard after a mediocre earnings report. We think it might recover this week but with Bearish consumer purchasing worries we aren’t taking the chance. Covered 1/28-2/16, and it finished -9.27% and a Loss, losing to its SPY benchmark by 13.46%.
LRCX is a drop because it doesn’t wow us in the Screener. Covered 2/13-2/16, and it finished 4.46% with a Win beating its SPY benchmark by 4.32%.
NVDA is a drop for this odd but compelling stat. This is the 9th time since 2001 that NVDA has had 7 up / green weeks in a row. The other 8 times NVDA was down the following week and averaged a decline of 2.62%. This is too much risk to ignore with the Sector storm clouds. No doubt it could keep going up but we don’t see enough clarity one way or the other to bet on that. Covered 2/21-2/23 and it finished +5.26% and a Win, Beating the SPY benchmark by 4.49%.
Short / Bear Adds - Link to Below Picture
Very straightforward here, adding stocks in opportunistic Sectors as well as targeting good momentum in the technical signals. The only thing you may be wondering is why we reached lower down to EQC when NSA is a Real Estate stock higher above it in our Screener. Since NSA reports this week we wanted to go with EQC for a lower risk profile.
Short / Bear Keeps
NAVI is a keep and returned -0.06% vs 1.67% vs the SPY benchmark. No reason to drop this one.
Short / Bear Drops
TRMB is a drop because it is just too low in the Screener. Covered 2/20 - 2/23 returning 2.26% and is a Win, Beating its SPY benchmark by .26%.
SWX is a drop for a variety of reasons but the most pressing one is the clear tide change in Utilities. We’ve been concerned about it for a bit in regards to any Utilities shorting. Covered 2/11 - 2/23 returning 6.92% and is a Loss, losing to its SPY benchmark by 5.59%.
ICLK is a drop mainly because China can be very tough to read, if this was an American stock and it was still so low in the signals we might hold. Covered 2/11 - 2/23 returning 3.15% and is a Loss, losing to its SPY benchmark by 1.82%.
Portfolio Allocation
5 Longs: LRCX, EXP, TRGP, LLY, ETN
4 Shorts: NAVI, LEG, LPL, EQC
Destroying the index. No brainer. Great article 👏👏