PERMA-HEDGE
02/16/26 Prospero.ai Investing - 293rd Edition (Weekend)
Dear Prospero.ai Family – we are a bit concerned with this market and are urging you to proceed with caution in the days ahead. To be clear, we are not predicting a crash, but we do think it’s possible that a decent pullback could be coming sooner rather than later. In this letter we’re going to give you two bearish reasons for our concern – and one slightly contrarian view.
Let’s jump into our concerns. Here’s what we’re seeing.
1. Net Options Behavior Has Shifted (Very Important)
I chose this chart that goes back all the way until Dec 1 for a specific reason. Typically we see SPY Net Options Sentiment either lead the market down or up at least react after it. Check out what happened when we entered 2026: Spy Net Options went to 0 and it stayed there. (Other than we on February 5th when we saw a blip upwards signal a good day was coming for the market.) In the past, when SPY Net Options dropped from Bullish to 0 for an extended period of time, that signaled a correction. AFTER the correction, it would jump back up into the 30’s and 40’s. But this year (as you can see from the chart), even during big upswings in the market, SPY Net Ops has remained been stuck at 0. Why? Because Institutions have changed their risk strategy.
The fact is that in 2025, hedge funds and institutions didn’t perform well. The majority underperformed the S&P 500. The primary reason for that underperformance was macro-economic uncertainty. Fast forward to Jan 2026. Net Options staying flatlined at 0 is evidence that Institutions have changed their strategy. Let me explain. In the first couple of years of Prospero’s history, big money used options as a mix of speculation and hedging – as a result, our SPY and QQQ Net Options scores would stay in the 40ish range and would only drop to 0 IF something obviously bad was about to happen. For example, SPY Net Options predicted the tariff market fall February-April well. Or when we were widely credited for predicting a big market swing in October. But it jumped back up when the market recovered. As a result, SPY Net Options was highly predictive regarding future market direction. You simply watched if it was bullish or bearish and acted accordingly. But now in 2026, despite the ups and downs of the market, SPY Net Ops has largely remained at zero. Not moving much at all. We believe this means a lot of big players have locked in an “always on” hedge (like collars and overlays) because they expect turbulence and do not want to get blindsided by unforeseen volatility and uncertainty. That’s why the SPY NOS number stays at 0 through downs and ups in the market.
But this brings us to a really important question. How should we read the fact that SPY Net Ops is pinned at 0? While it may no longer mean that a crash is imminent; it does tell us that big money is either concerned or bearish. They are very much protecting their downside. AND THIS IS KEY — They’re doing that because they view upside right now as limited. Think about it; the only reason you would keep bearish hedges is if you were convinced the market was either in a prolonged phase of chopping up and down, OR if you were convinced that any gains were going to be minimal. If they thought we were still in a bull market, there would absolutely be no continuous bearish hedging.
The positive side of this same set up tells us that if we see a sudden bullish spike of Spy Net Ops off the floor, that would likely BE HIGHLY PREDICTIVE of a coming upswing. Maybe a big one. For example, if we were to see SPY Net Ops go up all the way to 30 and stay there for a day or two, that means that they aren’t just bullish, but they are dropping their downside protection and it might just mark a late stage, euphoria like reversal! But that hasn’t happened yet. Bottom line? Big Money is bearish and RISK-OFF. Until you see that change, you should be too.
2. Flight to Safety is Picking Up Speed.
Zoom out, and the puzzle pieces fit a correction narrative even more clearly when we layer in broader macroeconomic evidence. Semi- and growth stocks have seen a pretty large outflow into other indexes, particularly a flight to safety of Utilities, Energy and Value stocks. Semi’s have been the backbone of the bull market of the last 3 years and money is flowing out of those sectors. Historically, that kind of flight to safety is indicative of a “topping” pattern in the market.
3. Slightly Contrarian View: Short Interest in the Tech Sector
I was scrolling through X this morning and saw a post from @kobeissiletter discussing $XLK the SPDR Technology Sector ETF. The post stated that $XLK has the highest short interest in 6 years; and has doubled over the last week. Keep in mind the implications of that. That’s a higher short interest than at any time during the ‘22 bull market or even during the Covid Crash. While at first, that might seem extremely bearish, oftentimes this can lead to a potential short squeeze and mean reversion in the Tech Sector.
To summarize: We see institutions having an “always on” bearish hedge, primarily because they see very limited upside. We see a flight to safety into sectors like Utilities. There are other reasons, but the point is that now is NOT the time to go blindly long. Stay nimble, hedge with SQQQ and rotate to defensives like Utilities and Consumer Defensives. And most of all, stick with us; we’re not just watching the storm, we’re navigating it with you.
But we are making some adjustments.
Instead of examining the low new informational value of constantly low SPY/QQQ Net Options Sentiment we are switching to an analysis of XLK and XLI for the foreseeable future.
We have adjusted our risk models to lower our concentration of Growth oriented longs.
Looking for what we would call opportunistic or event driven opportunities. And we are bringing you our first one ABVX. They have a very promising drug in phase 3 trials and rumored acquisitions that could cause the stock to go up 72%! Read our research report linked here.
A WORD FROM OUR CEO
Last week was another tough week but we had a good plan an increased our performance. Our paper trading portfolio is now 78% above the market on an annualized basis, with a 54% win rate against SPY benchmarks.
Our short intro + learning videos get you up to speed on how best use our letters and app to increase your wins.
Revised streams this week for the short week 2/17 at 11 AM ET and 2/19 at 3 PM ET.
Track all of your investments in real time with our app. Prospero’s proprietary AI tech updates key options signals like Net Options Sentiment, Upside and Downside every 3 minutes.
PERMA-HEDGE
Market/Macro Update w/ 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
CAP / VALUE ANALYSIS
Mid Cap Value overall has had the strongest returns so far, along with the other Value cap spaces, nothing new to see here. Any allocation in the Russel these past 3 months would’ve performed handsomely relative to the S&P. Large Cap Growth still a great momentum short trade overall, but it seems like the trend has really been overdone in some tech spaces.
Given our discussion above on the long term hedging behavior we are switching it up this week using XLK to more appropriately gauge sentiment . Not as bearish as QQQ NOS now, because of some strong pockets especially in the semi’s trade which is the only part really carrying the market right now on the large cap side. But we are definitely seeing more Bearish behavior in the first two weeks of February vs the last two weeks of January.
XLI NOS having a noticeable pullback, kind of taking the momentum out of the Industrials trade here that has been going strong for the last couple of months. Would be a good time now to trim exposure or even go short a bit at the top. Given the downtrend we have decided to target some Industrials shorts this week.
SECTOR ANALYSIS
Utilities have snapped back into leadership this week after a sluggish three‑month stretch, benefiting from a clear rotation into defensives as investors grow more cautious. Materials continue their strong run, supported by firm commodity pricing and steady demand trends. Financials, on the other hand, have materially lagged as renewed concerns around AI‑driven disruption weigh on brokerages and adjacent business models. Consumer Discretionary remains under pressure as the underlying consumer shows mounting signs of fatigue, and that weakness is increasingly broad‑based. Industrials stand out as one of the few stable pillars of growth in this tape. The sector’s earnings visibility and diversified end‑markets make incremental exposure look sensible here.
PORTFOLIO STRATEGY
With both XLK and XLI flashing bearish signals, we’re maintaining a net‑short stance heading into the week as macro headwinds continue to surface. We’ll keep long exposure only where the market’s broadening supports it, while covering portions of our Tech shorts and adding selective short exposure in Industrials, which appear to be rolling over after a clear peak. 7 Longs, 8 Shorts.
Long / Bull Moves – TPL, ABVX and TMUS adds / CROW, LEU, SNDK and ZS holds / ASTS and TMC drops
Portfolio Strategy
We have rotated away from a portfolio made up of 5 “higher risk names” (ASTS, TMC, LEU, ZS and SNDK) to 3 and targeted names with higher Momentum scores and stronger Profitability + Growth profiles.
Adds
TPL was an easy Energy add this week at the top of our screener. TMUS was also great for Momentum and Tech Flow. We added ABVX as well due to the opportunistic strategy discussed above.
Holds
CROX was held as a small cap value play with decent Tech Flow. LEU remains one of our favorites for Upside Breakout and Net Options. SNDK was kept as a memory play here. ZS we kept for Momentum.
Drops
ASTS and TMC were both dropped as they didn’t have sufficient Momentum in this week’s screener.
Short / Bear Moves – IAC, ROL, FTV, IBM, AAL, HPE and REZI adds / CTLP hold / CTSH, CBZ, AMD, SAP and BRO drops
Portfolio Strategy
Here we have chosen to de-risk by picking higher stocks in the screener as well as leaning more to the large cap side. We also picked 2 Industrials names to try to capitalize on the weakness we saw in XLI.
Adds
IAC was added as a well rounded Small Cap short. ROL was a good way to play the weakness in Consumer Cyclical with poor earnings power. HPI, FTV and IBM were all added for Tech short exposure with poor Net Options. Even though Industrials has performed well overall we wanted to catch the start of the contraction by getting exposure to REZI and AAL.
Holds
CTLP was kept for small cap Tech exposure with favorable Net Options.
Drops
CTSH was dropped as we liked other Tech names. CBZ, AMD, SAP and BRO were dropped as they were screened out this week.
Portfolio Summary
Long / Bull Moves – TPL, ABBX and TMUS adds / CROW, LEU, SNDK and ZS holds / ASTS and TMC drops
Short / Bear Moves – IAC, ROL, FTV, IBM, AAL, HPE and REZI adds / CTLP hold / CTSH, CBZ, AMD, SAP and BRO drops
7 Longs: TPL, ABVX, TMUS, CROW, LEU, SNDK and ZS
8 Shorts: IAC, ROL, FTV, IBM, AAL, HPE, REZI and CTLP
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