SPECIAL K-SHAPED?
02/08/26 Prospero.ai Investing - 291st Edition (Weekend)
Despite the market rallying last Friday, there is still one BIG FAT RED FLAG we still see waiving proudly in the air. Our Net Options Sentiment for SPY is still at 0. Big money is still deeply hedged and still very much risk-off. The question is WHY? We have a theory.
The recent jobs data is flashing a clear message: the labor market is losing altitude fast. , and it’s doing so across workers and sectors in a way that’s starting to rattle markets. Here’s what the new jobs data is really saying: Over the last few weeks, major labor data points have pointed to cooling, not collapse. Private payrolls rose by just 22,000 in January per ADP, barely half of already‑low expectations. And they would have been negative without a 74,000‑job surge in education and health services. December’s official payroll report showed only 50,000 new nonfarm jobs and an unemployment rate that rose to 4.4%, a lot higher than recent numbers. Job openings fell sharply into year‑end: JOLTS reported vacancies down to 6.5 million in December, a 386,000 drop on the month and nearly 1 million over the year.
What does all that data tell us? Well, beneath the surface, the labor market looks shaky. Good news? Layoffs remain modest at a 1.1% rate; but at the same time, but hiring is weak. Interestingly, openings are falling the fastest in white‑collar sectors like financial activities and professional and business services. The worst part? The unemployment pool (7.5 million people in December) now exceeds available openings. As one ING economist put it in previewing the January jobs release, “The labor market is clearly losing momentum, even if it is not yet in freefall,” noting that expectations in the 70–80k range “reflect a markedly cooler jobs engine than in prior years.”
This begs the question: “Why is labor data spooking the market?”
Well, markets had been trading on the assumption that we’ll have a “Goldilocks” economy: inflation drifting lower, unemployment staying low, and the Fed cutting rates gently into a soft landing. But a string of sub‑100k payroll prints, a 4.4% unemployment rate, and steadily falling openings do not fit that narrative.
The most interesting aspect of all, is what we see as an emerging of a K‑shaped economy. That can mean a couple of things. One, that companies’ revenue is increasing, but jobs are declining. That has not happened at scale in the history of the United States. Second, higher‑income households and certain sectors are doing fine and even thriving, while lower‑income workers and cyclical industries absorb most of the pain. Bank of America’s January Employment Report shows after‑tax wage and salary growth of 3.7% year‑over‑year for higher‑income households, versus just 0.9% for lower‑income households, a gap that has widened over the past year. Wealth and income concentration are intensifying that divergence. By Q3 2025, the top 1% of Americans owned a record 32% of total wealth, while the bottom half held only 2.5%. To add fuel to the fire, the share of U.S. GDP flowing to wages is at its lowest in more than 75 years, meaning the typical nonfarm worker is getting a smaller piece of a still‑growing economic pie. As one economist told CNBC, “The so‑called ‘K‑shaped’ recovery we worried about after the pandemic never went away, it just went quiet for a while. Now, with AI adoption accelerating, the split between secure, high‑income workers and everyone else is becoming impossible to ignore.”
Bottom line, Institutions are still very spooked about this economy and we’re seeing evidence of it in our low Net Options sentiment, even though markets might bounce.
So that leads us to one final question, how do we trade this market? I want to re-iterate what we said last week. Why? Because we were dead on in our analysis last week. We titled the letter, “I Spy a Bear Turn?” And last week, the markets dropped 3%. Not a collapse, but not a sign of strength either. Here’s what we said in last weeks’ letter on how to trade this market. It hasn’t changed…
“It’s becoming more and more obvious that we are no longer in a “buy the dip” but rather a “sell the rip” kind of market. How do we approach the coming week. First, if you’re sitting on a pile of unrealized gains, now is the time to do some trimming. We don’t believe that a crash is imminent, but anytime SPY Net Ops stays at 0 you have to be on guard. That’s not fear; that’s wisdom.
Second, respect how fast the market mood can change. Right now, the smartest move is fewer and smarter trades. Look for good entries that are combined with good Net Ops and Upside scores. Then don’t go crazy with your sizing. No leverage. Period. This is one of those seasons where the wisest people are okay being a little early on defense. The goal isn’t to call the top. The goal is to still be standing when things turn more bullish. Now a word from our CEO.
A WORD FROM OUR CEO
We wrote highlighted this in the letter because overall we have to respect the overall and longitudinal bull movement. Especially after Friday. But there are some cracks forming…
Well that was a hell of a week. The sharp turn bit us a bit but a lot of people struggled with the market this week. Our paper trading portfolio is 63% above the market on an annualized basis, with a 51% win rate against SPY benchmarks.
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SPECIAL K-SHAPED?
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
Growth had little resurgence on Friday as the trade might have been a bit oversold. Value however is still seeing the strongest returns in a while, definitely outperforming growth the last 3-6 months. Don’t see this trend changing overall as it is only healthy for the market to broaden out after so much concentration the last year.
QQQ NOS really hasn’t budged from the last week, not overly bearish like SPY is but still not confirming any bullishness right now. There are pockets like memory that are extremely bullish and others that are less so. Got to really think about subsectors in this market.
NOS still at the dreaded flat line after that blip on Thursday despite the rally in SPY itself. Would still remain relatively hedged at this point, things are just too uncertain in the broader market.
SECTOR ANALYSIS
Consumer Defensive continues to be one of the market’s steadier pillars, supported by solid earnings and strong capital return profiles. Industrials are having their moment as well, benefiting from the ongoing AI build‑out alongside strength in select Materials names. Tech staged a healthy rebound today after what looked like a brief oversold stretch. We’ll see whether there’s enough momentum to justify re‑entering the trade. On the other side of the ledger, Consumer Discretionary and Communication Services remain the most broadly short able sectors for now, with no meaningful change in their setup.
PORTFOLIO STRATEGY
Since the risk environment hasn’t changed that much from last week, and we haven’t really had a strong pullback, we’ll be going market neutral to start off the week really trying to lean into some of our winning longs and aggressively hedging our exposure. 5 Longs, 5 Shorts.
Long / Bull Moves – TMC add / CROX, SNDK, LEU and ASTS holds
Adds
TMC was added for some rare earths exposure as well as Small Cap exposure.
Holds
CROX was kept for Small Cap exposure. SNDK was kept to play the momentum out in the memory trade. LEU remains a favorite of ours with 90+ Upside Breakout. ASTS was an easy add with perfect Upside Breakout and great Net Options.
Short / Bear Moves – CALX, W, CTSH and CRWD adds / IONQ hold / BX, MRVL and APPN drops
Adds
We wanted CALX for some Tech exposure with low 52 Week Mid. W was added for Mid Cap exposure with low Net Options. CTSH was added for Large Cap Tech exposure with poor earnings power and favorable Net Options. CRWD was also added for similar exposure reasons.
Holds
IONQ was kept for favorable Net Options.
Drops
BX was dropped as we wanted to limit our Real Estate exposure. MRVL and APPN were both dropped as we found better Tech picks.
Portfolio Summary
Long / Bull Moves – TMC add / CROX, SNDK, LEU and ASTS holds
Short / Bear Moves – CALX, W, CTSH and CRWD adds / IONQ hold / BX, MRVL and APPN drops
5 Longs: TMC, CROX, SNDK, LEU and ASTS
5 Shorts: CALX, W, CTSH, CRWV and IONQ
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