So Bearish that we are Bullish?

02/27/25 Prospero.ai Investing (198th) Edition (Midweek)

Here at Prospero, we are hesitant to use the word "unprecedented". That's such a strong word. There's nothing new under the Sun. Right? Well, something just happened that we think might be fairly, if not completely…unprecedented. To show you what we're talking about, check out this graphic (via @macrocharts):

The red line graph at the bottom represents bearish sentiment in the market. Yesterday, it spiked to the number #7 highest ranking of all time. Considering what we've been through in the past 50 years, that's pretty darn bearish. But what makes this statistic so interesting, is that historically, when the bearish sentiment spikes that high, it signals the BOTTOM OF THE MARKET. Here are a few times that the Bearish Sentiment chart spiked to the level it did yesterday. The bottom of the 1990 bear market. The bottom of the 2022 bear market, and mid way through the 2008 Global Financial Crisis. So why is what happened yesterday unprecedented? The Bearish Sentiment Indicator has never spiked at an S&P 500 All-Time high. What in the world is going on? In the past, when that number spiked to current levels, it meant it's time to sell your house, your car and maybe a kidney and go all-in with the market. Why? Because when this number flashed it meant that a strong bullish turnaround was right around the corner. What in the world does all this mean? Could this mean that we have a huge melt up about to occur? Typically crashes occur when the market is in a state of Euphoria. We are literally sitting in the opposite state. It'd be nice if our Net Options Sentiment gave us some insight, but both SPY and QQQ are telling the literal opposite stories. QQQ is hovering near our bullish levels, while SPY Net Options Sentiment finished yesterday at 0. Now this could mean institutions are more bullish on Tech or just leaning all of their weight to hedge the market on SPY. SPY Net Options Sentiment at 0 is typically what we see in extended Bear runs, so this isn’t a surprise. But QQQ Net Options Sentiment at 34 is high for a Bear market. As I write this letter (pre-market), the market is bright green. Stay on your toes this could be an interesting couple of days. If QQQ Net Options Sentiment goes down, be careful, if SPY goes up it may signal an opportunity to ride a few days where the market swings back up from this Bear correction.

One thing that adds even more intrigue to this is that Trump Plans Tariffs on Mexico and Canada for March 4, While Doubling Existing 10% Tariffs on China. We’ve typically seen the market react quite negatively to these types of announcements but does this green mean the market doesn’t believe that Trump will actually enact them? Or does it mean that institutions think these tariffs are already priced well relative to their probability? Either way an interesting development in the tariff saga.

A WORD FROM OUR CEO

Not great, but could be a lot worse of a week as we remain above water beating the S&P 500 by 59% annualized, with a win rate of 64% against SPY benchmarks.

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So Bearish that we are Bullish?

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