Some risk lessons
11/19/23 Prospero.Ai Investing (76th) Edition (Weekend)
A very happy birthday to my mother Merle! She says she doesn’t understand this letter but at least she will get this part :)
We have a lesson right from the top. We missed a basic check that we were in the habit of doing on TXG, which reported earnings on 11/13. We haven’t been playing earnings and for Biotech it is even less advisable. There are two important things we wanted to point out here:
No matter how long you’ve been doing this, everyone makes mistakes. Stay vigilant!
We’re excited for 2024! We are cruising towards a full year of 50%+ beat of the S&P 500, which is great! But the fact that we’re doing that while our process is still being refined and perfected, means we can do even better next year.
We are currently beating the S&P 500 by 59% on our 2023 picks, with a 63% win-rate per pick against S&P 500 benchmarks.
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Some risk lessons, Outline:
Market/Macro Update
QQQ and SPY Net Options Sentiment
Portfolio Macro Strategy - A Lesson on Risk
How we are approaching the number of longs/shorts and sectors
Longs
Adds —> Keeps —> Drops
Shorts
Adds —> No Keeps —> Drops
Portfolio Summary
Market Update
For Tech: QQQ Net Options Sentiment > 35 = Bullish. < 25 = Bearish.
For Non-Tech: SPY Net Options Sentiment > 25 = Bullish. < 15 = Bearish.
QQQ returned 2.02% this week vs 2.31% for SPY. While SPY Net Options Sentiment was not as Bullish, the below graphs are about what you’d expect in an up week with slowed Bull momentum. (Last week SPY was up almost 6%)
There is another key data point we need to take into consideration. The market declared inflation has been slayed! That’s reflected in these 0% bets on a rate hike.
The days of 0 Net Options Sentiment seem to be long behind us. Those that have read our newsletter for a long time, know that I’m not very quick to put my Bear goggles away. But the 0% bet on another rate raise; and increasing bets on an ease by Q224 (up to 62% from 58% on 11/15), means the macro Bull case is gaining strength. This is especially true for 2024.
Guidance gets even more Bullish on QQQ to reflect the stability at higher levels.
For Tech: QQQ Net Options Sentiment > 40 = Bullish < 30 = Bearish.
For Non-Tech: SPY Net Options Sentiment > 25 = Bullish < 15 = Bearish.
Portfolio Macro Strategy - A lesson on risk
Last week we chose 4 Bulls and 3 Bears, because we had some concern over the long Bull run. We were also concerned about Moody’s credit downgrade for the US. You can look at risk in a lot of different ways, but while the 3 Bears hedged our downside, it exposed us to a different risk. This risk was too much short-exposure in a market that could move Bullish very quickly.
So, we’re adjusting and pairing down to 2 Bulls and 1 Bear; as well as a Bull position in IWM (Russell 2000). We like the upside of the IWM beating the market (if it turns more Bullish) because it has recovered much slower than the S&P 500, and most certainly the QQQ. The IWM also has more tech/Growth stocks that we think could have a nice run the next year or so. We might have this IWM position open for a while!
It is hard not to be Bullish with headlines like: Michael Burry of 'Big Short' fame has closed bets against S&P 500, Nasdaq. But this provides a good lesson, because even as the market recently went up, we heard “Burry is still short.” This video is an important lesson in why you have to be careful when you hear people saying things like that.
You’ll also notice that we switch up our Screeners to include Profitability + Growth. We do this as another bet that Growth stocks will start to see more rewards, so long as Profitability is solid as well.
Long / Bull Adds - Link to Below Picture
Trading can get weird towards the end of the year, so we’re culling the list down to our highest conviction stocks. As a result, it makes sense to pick 1 and 2 in the above screener.
Long / Bull Keeps
LLY is a keep, and returned -1.00% vs 2.31% for the SPY. Screener rank is still great, as are technical indicators. This was an easy hold decision.
Long / Bull Drops
TSLA was added on 11/14 via chat to our paid subscribers. And is now dropped due to being filtered out in our Screener. Covered 11/14-11/17 and it finished +.97% and a Win, Beating the SPY benchmark by .05%.
Meli is dropped due to “Sell” for the technical Oscillators. We’re not taking any chances! Covered 11/05-11/17 and it finished +4.34% and a Win, Beating the SPY benchmark by .87%.
PH is dropped, due to being low in our Screener. Covered 11/12-11/17, and it finished +3.14% and a Win, Beating the SPY benchmark by .83%.
AVGO is dropped, due being filtered out in our Screener. Covered 11/12-11/17 and it finished +2.11% and a Loss, Losing to the SPY benchmark by .2%.
Short / Bear Adds - Link to Below Picture
A quick note on the screen below. Some stocks were filtered out, because they had market caps (price * shares outstanding) below $1B. These are only stocks with market cap greater than $1B.
While NAVI and LXP could have easily, both been the picks. We went with LXP after our TXG earnings snafu. NAVI has an ex-dividend date of 12/1, so we don’t want to mess with it potentially going Bullish, as people could buy the stock, simply to capture the dividend. Made LXG our best choice on a combination of Screener and technicals.
Short / Bear Drops
PBR was dropped as a Bear, as it performed poorly in the above Screen. Covered 11/12-11/17, it finished +5.32% and a Loss, Losing to the SPY benchmark by 3.01%.
TXG was dropped as a Bear, because it was filtered out of the above screen. Covered 11/12-11/17, it finished +18.86% and a Loss, Losing to the SPY benchmark by 16.55%.
NAVI was dropped as a Bear, for the dividend reasons stated above. Covered 11/12-11/17, it finished +.48% and a Win, Beating the SPY benchmark by 1.83%
Portfolio Allocation
3 Longs: META, LLY, IWM
1 Short: LXP