Occam's Razor
7/31/24 Prospero.Ai Investing (142nd) Edition (Mid-week)
We made a statement in Sunday's newsletter. We said: "This market may be volatile, but I guess it beats being bored". My goodness, this week has been anything but boring! On Tuesday, we saw one of the largest pullbacks in the market in quite some time. Look at the Nasdaq (QQQ) chart below…
The last arrow is pointing to the price action we've seen over the last several days. Pretty steep drop off. But yesterday (not shown on the chart), we had a strong reversal off the bottom trend line and QQQ came roaring back. George (our CEO) asked me (Matt) to write the intro to this midweek newsletter, because while he had a solid day on Wednesday, I had the single best trading day of my career. George told me that he was probably overthinking things, which caused him to be hesitant. But I made some really good moves that I can honestly say was all because of Prospero's numbers. Here's what happened. As most of you know, our QQQ Net Options Sentiment numbers have been at 0 for the last several days. As you can see from the chart above, that ZERO was reflected in the price action. QQQ went straight down over the course of last week and through Tuesday. George is pretty convinced that institutions were hedging against QQQ (for multiple reasons which we addressed in Sunday's letter). A jump from 0 on our 2,000 stock scale to 50 STRONGLY supports that. Options positions with longer conviction are rarely excited so aggressively. But bottom line, our Net Options Sentiment was pegged at zero, and Tuesday was brutal. As the market closed, Net Options were still at zero. But then the winds began to shift. AMD beat on earnings and NVDA (which had a steep sell off on Tuesday) began to slowly climb in the after-market hours. Wednesday morning came around and I opened up the Prospero App and checked QQQ Net Options Sentiment. After several days at zero, it quickly jumped to 49 (VERY BULLISH). See the chart below…
You can see the MASSIVE upswing in QQQ Numbers on Wednesday morning. At the same time, NVDA (and other chips) began to climb. There was one other data point I wanted to look at before I made any trades. META was having earnings after the bell yesterday, so I looked at META's Net Options Sentiment and Upside numbers. They were both at 100! I quickly did the math in my head. QQQ is at the bottom of its trend channel resistance line (if it was going to bounce, it would likely happen there) QQQ Net Options Sentiment has bounced from 0 into the high 40's. Semiconductor stocks were running (which often carries the market) and META's Prospero's numbers in our two key Bull signals Upside and Net Options Sentiment were pinned at 100. Historically this is a very strong Bull signal for META. I then did something I have never done. I bet a short term call option on Meta before earnings. (Don't tell my wife ;). Throughout the day, I made a few trades and did really well. But then after the bell, Meta released earnings and sure enough, the stock went flying! Needless to say, the option did extremely well.
When I discussed this yesterday with George, he told me that sometimes, because of Prospero, folks with less experience can outperform Wall Street veterans. Why? Occam’s Razor explained simply, sometimes the simplest explanation is the best one. I simply trusted the numbers. Too little thinking can often get you in trouble with the markets but the power behind Prospero’s metrics was designed to do a lot of heavy lifting for you. Even though Meta's Net Options Sentiment and Upside was at 100, George said he wasn't making any trades into META's earnings because Google's poor advertising revenue spooked him. (Even though he did also remark that he thought META got hit too hard froom their earnings given their different ad businesses). He also told me that he should have been more aggressive with his shorts when QQQ Net Options was at zero! But he was dealing with another complication, he has remained Bullish on chips because he saw no reason for those sales to slow down even if AI products weren’t there on monitization yet, the chips orders were in spades. Why forecast something to slow down when it has shown no signs? QQQ Net Options Sentiment was there to help him, as were the META signsls, he looks right about chips too! But managing all of these things proved to be a lesser strategy to mine. George, who has been working on or near Wall Street since he was 17 years old said: "I simply was overthinking instead of trusting the numbers" Bottom line folks, Prospero works! Like I often say, it's not a crystal ball. It can't tell the future, but it can clearly show where the big boys are putting (or pulling) their money. I have a vacation coming up in two weeks, so I'm really thankful I trusted the numbers!
A WORD FROM OUR CEO
In another volatile week, we are beating the S&P 500 by 53% annualized, with a win rate of 61% against SPY benchmarks.
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