Sometimes hedge funds are wrong.
6/2/24 Prospero.Ai Investing (125th) Edition (Weekend)
Our preferred title that was a little too long was “Sometimes you eat the bar, and sometimes the bar eats you.” Either way, a point we always make is that financial institutions concern themselves much more with beating each other than beating retail investors.
A close and highly relevant point to this week is sometimes, the smartest hedge funds are wrong. There is a saying on Wall St. that if you are right 51% of the time that’s all you need to start a fund. (Of course we sit at 61% right this year, after 60% last year)
Why are we making this point? That hedge funds filled with smart people go out of business every year, that if you watch The Big Short you can see an example where MANY more institutions were wrong than right. We are making that point because a big part of being a good investor, or trader is understanding that even if you have an exceptional process, you will be wrong, often.
We are making the point because we had a tough week. And it is important to take any tough week seriously but not too seriously. The primary philosophy behind Prospero is aggregating / visualizing where institutions are making their options bets in real time because overall, they know way more than us. Following that didn’t work for us this week and that won’t be the last time. But zooming out, we are up on the market by 76% this year and that’s after about ~50% each of the last two years. That’s why we grow our process not change it. Indeed Prospero.Ai is an aggregation and automation of lessons I’ve learned over 20 years of experience working in investing, and the 13 years our team has been in AI.
We will have a special section on what we’ve learned this week. An otherwise exciting week for us! We rolled out our new push notification system this past Friday. We will now use that Screener to alert users with our current market view. So if you do not have the app, it might be a good time to download it below!
Also, we have a special guest tomorrow for our 11 AM EST livestream. Dave Lauer, CEO of one of our partners Urvin.Finance. Dave has testified about the finance industry to congress. Dave and his team are doing important things with shareholder rights and Wall St. reform, so check out their platform if you haven’t yet. Our Wednesday livestream is at it’s normal 3 PM time.
For newer readers linking our short intro + learning videos.
Don’t have our app yet? Use it to track your investments with Prospero’s proprietary AI tech.
Sometimes Hedge Funds are Wrong
What the Market Taught us this Week
Our important takeaways from a volatile and interesting week
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
New Special Screener
What did we learn this week?
If you ask any great investor or trader how they got that way, they will almost certainly tell you their skills were forged in the fire of what they got wrong, not right.
1. We would not call the market Bullish anymore — We’ve been calling the market tight and saying we were cautiously Bullish. Even when others were highly Bullish we’ve been apprehensive and staying fairly even long / short. So how did we get caught on Friday overextending Bullish? (Adding a 2nd NVDA and META when they were streaking up pre-market) Because we were treating this like a tight Bull market. When we saw a nervous reaction to Macro / GDP news that was pretty much exactly as expected that was validated. When we saw an excited reaction to PCE at expectations (what many economists say is the most important inflation measure) we thought that was going to put the “Bull” in cautious Bull market. But until further notice we won’t be fooled on that again. Apparently, it doesn’t matter how much excitement NVDA can put into the market, it is too uneven to get comfortable.
2. Respect the process — NVDA, SMCI and META were all filtered out of our screener last week due to elevated Dark Pool or Short Pressure. We tend to see stocks that are filtered out but still have excellent Screener rank as a judgment call. But we are recommending everyone get back to the basics. We practice what we preach so we won’t be eschewing the Screener terms so easily again. We also kept CB over APO due to the “Buffet factor” we are shaking our heads as we write it. APO looked stronger in every other category that wasn’t this made up one, no more shenanigans like that this week. APO had a much better week. Spoiler alert: we dropped CB and added APO this week because what was true last week is even more so this week.
3. This election year isn’t typical, don’t oversample the old — If there is one thing we’ve learned as a data scientists time and time again it is that training on a large sample is great but if you are weighing new and old information even close to the same you are doing it wrong. Sure this is an election year and election years tend to be highly Bullish. But this isn’t a typical election year nor is it a typical election year market. Sure the market is doing well but a lot of that is tech / AI.
4. Patience, patience, patience — We will talk below about how we have had successful pre-market moves in the past and sometimes you go with your gut. But honestly, we rushed the decision a little on Friday. I was about to be in transit to celebrate my Dad’s 75th birthday (Happy birthday Leo!) and I pressed to make a move when I didn’t have to. I could have waited for the QQQ Net Options Sentiment reading before adding META and another NVDA but I wasn’t patient. I remind myself to be patient all the time, and I’ve come a long way, I owe a lot of my success to that. You can be too patient with the market sometimes, but it never hurts to remind yourself a million times to remember patience is a virtue. I’ve been impatient to a fault WAY more times than I’ve been too patient.
Market/Macro Update w/ Cap/ Value Analysis
Last week’s Net Options Sentiment levels from the 5/27 letter:
SPY and QQQ Net Options Sentiment > 40 = Bullish < 30 = Bearish.
There is one story we are looking into this week. What to do about our Tech heavy lon strategy that has served us so well this year. Let’s just dive right into the data!
CAP/VALUE ANALYSIS
See the chart below. There is one glaring takeaway from the 1W, this is a hard Growth correction. The only question is how long? The answer is we don’t really care, we are going to be defensive.
NET OPTIONS SENTIMENT
See the chart below. We put a lot of work into setting our levels so people do not have to have a long history with QQQ or SPY Net Options Sentiment to know where they stand. Sure enough QQQ Net Options Sentiment lost the Bull line a number of times before the big dip. While these metrics are powerful the one downside is, since they update with the options markets, they do not update pre or aftermarket. When we got aggressive pre-market with the PCE reading we didn’t have the benefit of a live QQQ Net Options Sentiment but we’ve been right with our pre-market bets many times. When you get to be a very experienced investor, on your best days, it is like Chess, you see the board and all the moves and you can see your path to victory. Most days it's more like Texas Hold Em’, you see your cards, some others and don’t know much else. You’d rather be playing Chess, but you won’t get very far if you are afraid to play poker.
See the chart above. The positive SPY trend to end the week is what is keeping us neutral vs. Bearish. About a month ago we wrote a completely different letter when we saw a correction to value. It reversed hard back towards Growth that week. So we are not overreacting like that again, especially with NVDA telling us for some in the right place with AI Growth isn’t going anywhere. Which is why we are leaving our SPY and QQQ levels in the same place but we may re-evaluate that as early as the middle of this week.
SPY and QQQ Net Options Sentiment > 40 = Bullish < 30 = Bearish.
SECTOR ANALYSIS
One thing we are absolutely going to do to make sure we don’t have another tough week is make sure we are properly short on Tech due to this trend. The other takeaways are we see opportunities in many Sectors away from Tech. So we will broaden as well as make sure we are targeting one Energy Bull as the positive one week trend is one we cannot ignore.
PORTFOLIO STRATEGY
We’ve said most of what we want to do here but just to review.
We will diversify our longs.
Stay even Bull / Bear
Target Tech shorts
Long / Bull Moves - Link to Below Picture
Long / Bull Moves - FANG, ARCH, APO adds / LLY, TDG, NVDA holds / CB, FIX, SMCI, PDD, SMCI, META drops
Adds
FANG, ARCH and APO are part of our diversification movement. With the highly strong technicals to back, easy adds.
Holds
LLY and TDG had good weeks. TDG was an easy hold and overall great momentum even through a volatile few weeks. The only tough call was SRPT vs. LLY but we went with LLY for 2 reasons. 1. It was 26 points higher in the Screener. 2. SRPT’s positive technicals were as a result of a news event which we don’t weigh as heavily as if that kind of momentum was generated without the event. NVDA just had too good of a quarter to drop now. It showed a lot of fight on Friday too on a hard day for Tech. We told ourselves with this renewed commitment to the Screener filter that we’d allow ourselves to make one exception per week. And that is NVDA this week.
Drops
SMCI and META were easy drops due to renewed commitment to the Screener filter as well as technicals going in the wrong direction. FIX was dropped as a lesser industrials pick to TDG by really any measure. We talked about CB a few times already, no Buffet factor in the decision this week. PDD was a tougher drop, we like the trend but in the end we are going with the Screener filter.
Short / Bear Moves - Link to Below Picture
Short / Bear Moves - FLO, WEN adds / PBR, LPL hold / WBD, JNPR, ASC, FIZZ drops
Adds
FLO might seem like an odd add vs a FIZZ hold. But we actually have a new signal almost ready for release. And it has FLO at 38 and FIZZ at 51 lower is better and we are going with
Holds
LPL is by far the best pick overall, especially since it is tech. PBR is a tough call, but we think Energy could reverse or continue so having 1 long and 1 short makes sense.
Drops
WBD, JNPR and WBD are all easy drops, signals and technicals.
Portfolio Allocation
7 Longs: LLY, NVDA 2X, TDG, APO, FANG, ARCH
7 Shorts: LPL, PBR, FLO, WEN and 3 to be revealed in the next section