PARADOX NOW
5/27/24 Prospero.Ai Investing (123rd) Edition (Weekend)
A paradox is a situation which combines two contradictory features or qualities, that can’t seemingly be true at the same time. One example is the “Unstoppable Force Paradox”. It states: “What happens when an unstoppable force meets an immovable object?” In other words, when you have a force that can’t be stopped; and it comes in contact with an object that can’t be moved. What happens? That’s a paradox. As we continue into the middle of the 2024 market, we find ourselves in paradoxical times. Let me explain…
The Unstoppable Force:
Nvidia. Last Wednesday, Nvidia delivered another blowout earnings. As a matter of fact, blowout might be an understatement. Here’s a quick snapshot of their earnings.
Revenue of $26,04 Billion. Up 262% YoY.
Operating income of $18.06 Billion. Up 492% YoY.
Free Cash Flow of $14.94 Billion. Up 466% YoY.
LET. THAT. SINK. IN.
Free cash flow up 466%?! These are unbelievable numbers! On top of that, they raised guidance for the future. Then, they essentially told us they’re no longer just a hardware company, making a product that everyone in the world is trying to get their hands on. But in addition to hardware, they’re expanding into a software company that is growing its recurring revenue in ways that nobody can comprehend. Oh yea, then there was that whole part of the earnings call where CEO Jenson Huang said Nvidia was going to make a new chip every year. AND, he essentially said that the only thing keeping them from making even more money from the ever-growing demand all over the world, is how fast they can manufacture the chips. The market saw those numbers and realized that A.I. is for real and that we’re just scratching the surface of how this is a world changing technology. Huang even called it “The next industrial revolution”. He’s probably right. The world is changing and the sky’s the limit for how high the market can go! Right? Not so fast.
The Immovable Object:
The immovable object I'm referring to is no other than the great Oracle of Omaha, Warren Buffet. Warren Buffet recently sold $20 Billion of his favorite stock (Apple). Don’t breeze past that last sentence. My man just sold 20 BILLION dollars worth of the stable, predictable AAPL. On top of that, he’s sitting on a mountain of cash, to the tune of $157 Billion dollars. That’s his largest cash position…EVER. What does that tell us? One thing we know for sure, is that Warren Buffet likes to buy when stocks are really low and sell when they are at their absolute peaks. So for him to be sitting on the largest pile of cash in the history of his career, means that he’s more pessimistic than he's ever been in his career about the future of the stock market. He’s obviously expecting a substantial drop in prices. And there’s something you need to know about Mr. Buffett. He’s right, WAY MORE OFTEN than he’s wrong.
So what happens when an unstoppable force of Nvidia’s world changing tech, meets the immovable object of the greatest stock manager in history, who is now historically bearish and betting the farm we’re about to collapse? Well, it’s a paradox. We’re in uncharted waters. We’re experiencing unprecedented times. (add your preferred cliche here)
But the good news is that Prospero is succeeding in this crazy market. So when an unstoppable force meets an immovable object, one of them will eventually win; and we’re going to walk alongside you until that becomes a reality.
A WORD FROM OUR CEO
We controlled for risk around the binary earnigns event but still had a strong week gaining 8% on an annualized basis. We are now beating the S&P 500 by 94% with a win rate of 63% against that benchmark.
Special livestream times this week including Options 101 with esinvests at 7 PM EST Thursday 5/30. Also tomorrow 5/28 at 11 AM EST and Wednesday 5/29 at 3 PM EST.
For newer readers linking our short intro + learning videos.
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PARADOX NOW
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 5/19 letter:
SPY and QQQ Net Options Sentiment > 40 = Bullish < 30 = Bearish.
In our letter last week, we thought that strong Nvidia numbers could spark a huge stock market rally. Nvidia did their part, but the day after earnings the market declined significantly. Then on Friday we saw a bit of a turnaround and we ended the week on a strong note. Our guess for the hesitancy on Thursday was in line with a “sell the news” type of event. Even though Nvidia is reasonably valued considering their forward earnings, it presents a different problem facing the market. As we speak, the top 10 companies % share of the S&P 500 index has reached 35%, which is the highest recorded % in over 50 years. This exceeds the 2000 Dot Com Bubble by 8%. On top of that, Nvidia ALONE has contributed to 39% of the S&P 500’s market cap growth year to date (Via @kobeissiletter). The current market cannot function without Big Tech. How long this rally will extend is anyone’s guess. One thing we know for sure is that some pretty successful traders are preparing themselves for the worst. But the relative strength of the Technology Sector and our QQQ Net Options Sentiment numbers are still strong; so we will remain cautiously bullish as we move into this coming week.
CAP/VALUE ANALYSIS
See the chart below. Sectors are still up and down, back and forth and it’s hard to make a definitive call with the uncertainty of the market. In light of that, let’s listen to the old adage, “When in doubt, zoom out”. When you zoom out, there is one sector that is green for the day, week, month, and year. That is Large Cap Growth. In light of that, we are going to continue to lean cautiously bullish in that sector, until an obvious trend presents itself.
NET OPTIONS SENTIMENT
See the chart below. Last week we saw a shift and QQQ Net Options Sentiment had a better week than its SPY counterpart. QQQ experienced a better week than the general market, largely due to Nvidia having a great on Thursday, despite the market being red across the board. Interestingly, we saw a slight jump on Friday and QQQ numbers ended strong on Friday, with a solidly bullish 47.
See the chart above. One thing we see, is that SPY Net Options sentiment has been on a slow and steady downtrend for the last couple of weeks. Even on Friday, we didn’t see the bounceback we saw in QQQ. Having said that, the numbers remained (slightly) in our bullish zone on Friday’s close. This gives us further confidence to lean Bullish, but remain defensive and not get too overextended.
SPY and QQQ Net Options Sentiment > 40 = Bullish < 30 = Bearish.
SECTOR ANALYSIS
One thing that stands out is that Tech has had quite a strong and consistent month if you zoom out. But if you recall the last chart, Tech is not as consistent as Large Cap Growth. But if you had to bet on one sector, just based on the data, that would be your best bet. Two quick final points of interest, Healthcare was the only sector in the red on Friday, worth monitoring... It will be interesting to see if they rebound in the coming week. Finally, the Utilities rally might be coming to an end. They had a very poor week, comparatively to their strong 3 month run.
PORTFOLIO STRATEGY
NVDA sent a strong message to the market / those that were saying AI was overvalued. It said “AI growth is still ascending faster than even what some would say the company in the best position to understand it can predict.” So what has been a finnicky market feels a little easier to trust on the Bull side this week so we are willing to increase our portfolio size but still stay relatively neutral to be defensive. 8 Bulls and 6 Bears.
Long / Bull Moves - Link to Below Picture
Long / Bull Moves - PDD, TDG adds / SMCI, LLY, COST, CB, CEG, NVDA holds / AVGO, HUBS drops
Adds
PDD and TDG look like the 2 strongest stocks in a combination of Sceener and technicals so they were easy adds.
Holds
All 5 of the holds looked strong in technicals and strong enough in the Screener that they weren’t difficult hold decisions. CB was a bit of a tough call with APO looking a bit better in the above data, but the higher Net Options Sentiment and the Buffet factor (he just bought a bunch of CB) has us sticking with CB for now. SMCI had 90 Dark Pool and 72 Short Pressure which did give us some pause but the we’ve never seen it in the #1 Screener position so worth taking the risk. And NVDA is 74 Dark Pool and 66 Short Pressure so it barely got filtered out. After that earnings report we have to give it one more week but we may have a quick exit trigger finger.
Drops
AVGO was a victim of just wanting to pair down tech exposure and HUBS really turned in the technicals so it was an easy drop.
Short / Bear Moves - Link to Below Picture
Short / Bear Moves - BXMT, FIZZ, CRI, WBD adds / PBR, LPL hold / WEN, EVTC, LYB drops
Adds
BXMT, FIZZ and WBD were the best Screener / Technical combinations outside of PBR and E and we will get to that in holds. CRI was added because it was slightly better than WEN, especially in the higher Downside.
Holds
PBR was an easy hold the only question was if E was preferred but we liked, especially the lower Net Options Sentiment of PBR. LPL in some weeks could have been dropped but with the risk of SMCI and NVDA on the tech side we wanted some downside protection with a Tech hedge. LPL especially is a nice pairing because it is in hardware and also has some consumer exposure. It has been a go-to Tech hedge for 1+ years now.
Drops
WEN was narrowly beat out by CRI. EVTC and LYB were not strong picks due to lowered performance in the Screener and techincals going the wrong way.
Portfolio Allocation
8 Longs: COST, SMCI, CB, LLY, PDD, NVDA, TDG, CEG
6 Shorts: BXMT, FIZZ, CRI, LPL. PBR, WBD