SUMMER MELT UP?
05/10/26 Prospero.ai Investing - 317th Edition (Weekend)
Happy Mother’s Day to all the Mom’s out there!
Let me state the obvious: We’ve had quite a rally as of late. And the talking heads on X have turned bearish. Recollections of the 2000 Dot.com bubble are rampant and valuations are at historic highs. But are we due for a crash? Nobody knows, but we have a theory. And here it is: We think this rally could turn out to be a bull trap for the ages. We are not sounding the alarm today by any means but let’s explain what we are seeing…
Stock market concentration is at a record high. UBS data shows the number of S&P 500 participants in this rally has fallen below even the dot-com peak. A handful of names are doing all the work.
Shiller PE at 41.24. Per Barchart, only the dot-com bubble printed higher. We’re trading above the 1929 peak. Above the 1960s. Above everything except the most famous mania in modern memory. That’s pretty crazy.
Semiconductor P/E at 60. We’re seeing the highest valuation for the SOXX since the dot-com bubble. Easy to say that the sector is WAY overbought.
Calls are running at 60% of total SPX option volume. That’s the highest reading in nearly a decade. When the whole room is leaning one way, contrarians smell a top.
And as a kicker — ADP (National Employment Report) came in well above forecast at 109K vs. an 84K consensus. Good news right? Partly. If jobs numbers start growing rapidly, that could mean (with sticky inflation) that rate hikes could be back on the table. Higher interest rates almost always = lower equity prices. And with Warsh widely expected to take the Fed chair at the June 16–17 meeting, the macro tape gets less predictable fast.
The Good news is that our Signals Saw this Rally Coming BEFORE it happened:
On April 8th, one full month ago, something interesting happened. QQQ Net Options Sentiment, after spending 3 ½ months in single digits, suddenly jumped into the 20’s. We immediately sent an alert out on X.
Prospero fam, that alert came after a long drawn out correction in the market. But since that alert SPY and QQQ have done nothing but gone up and have increased roughly +17%. If you take the reading from when QQQ Net Options Sentiment first entered our Bull zone of > 40 04-14-26 at 11:39 AM ET it’s up 13.78%. Now fast forward to last Thursday. Most of the talking heads were bearish after a freakishly strong move in the market and were calling for a pullback. But once again, our signals told a different story. Last Thursday our QQQ Net Options Sentiment jumped to an ALL TIME HIGH OF 67!!! Again, on SPY and QQQ Net Ops, the bullish line is 40. So a QQQ Score of 67 showed that big money was ALL IN for Tech. But what got our attention was SPY. Spy had remained at 0, even though QQQ was very bullish. Then last Thursday – the day before Friday’s rally – with QQQ in the 60’s, SPY Net Options Sentiment suddenly jumped from 0 to the 20’s in a single session. While still technically under the bear line, a move from 0 to +20 isn’t noise. It’s a regime shift. Big money was removing hedges and leaning into this rally. We posted that alert Thursday morning on X. Friday came and delivered a strong bullish trend rally.
So what’s actually happening?
This massive move in our Net Options Sentiment begs a question: Are we at the start of a big new bull market? Probably not. Are we in the early innings of a melt up? Possibly, maybe even likely. But when you look at all the data together, we think this is beginning to look like institutions might be pulling retail in for exit liquidity.
The reality is that institutions can raise call volume and buy stocks so aggressively that it raises the price of the market. The market keeps going and going up…and retail starts feeling FOMO and goes all in, leveraged to the hilt. THEN… Big Money (at some point) will sell into that strength. Retail is left holding the bag.
Last week, John Paul Tudor Jones, one of the most trusted traders on Wall Street, came on CSNBC basically said as much. He stated that this rally has legs. AI is legit and we could see significantly more upside. But the music will stop at some point. And his words were something like: “When it drops, it’s going to be insane.”
Important Safety Tip: This topping process could take awhile
In last Sunday’s letter, “Backtest to the Future”, we talked about how the closest historical analog to May 2026 was May of 1997. The macro economic and market similarities are eerily similar. May ‘97’s rally lasted through much of the summer and into the Fall. The topping process lasted months, not days. There were dips, but every dip got bought. Shorts started to cover. FOMO kicked in. We melted up. But then in October, everything changed and the rug was pulled.
What this means for you:
Bottom line, if you’re not paying attention to SPY and Net Options Sentiment, you are missing one of the best “tells” about the future direction of the market. As long as SPY and QQQ stay in Bullish territory, dips will continue to get bought. On top of that, word leaked yesterday that the war in Ukraine could be coming to an end. That is NOT priced in yet. This market could keep on soaring. But, when the rotation comes, it will come fast, and you don’t want to be the one holding the bag.
Our framework right now? Stay engaged with the rally, concentrate on highest-conviction names, and watch the institutional sentiment readings (QQQ and SPY) — not the valuation charts — for the actual turn signal. When SPY Net Options Sentiment rolls back toward zero and QQQ comes off historical highs into the teens, that’s when the music slows.
Until then, the bearish charts are loud, but institutional money is louder. Be safe out there. This won’t last forever. But until Net Options shifts, institutions are feeling frisky. Buy the dips and enjoy the ride. 🚀
— The Prospero Team
A WORD FROM OUR CEO
We had a fantastic week and held onto most of our longs with little changes necessary. We really nailed it with our short entries in this hot market and our paper trading portfolio is now 38% above the market on an annualized basis, with a 56% 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.
Back to our usual stream schedule this week 5/11 at 11 AM ET and 5/13 at 3 PM ET
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SUMMER MELT UP?
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
Looking at the 1 week data, Large Cap Growth has been the clear winner. Going back to the 1 month it’s even more striking with what is a good annual return in one month. Small and Mid Caps held their own on the Growth side, while Value struggled with all the momentum going the other way.
QQQ Net Options Sentiment has been on an absolute tear recently—literally jumping off our charts to the point where we had to raise the axis numbers just to make it fit! As you can see in the data, NOS continues on this spectacular run, remaining highly elevated well above the Bull Line and clearly leading the massive surge in price. This sustained, record-breaking sentiment is a massive underlying signal of strength.
While we technically remain in bear territory with some ongoing hedging in SPY, the chart clearly shows underlying bullishness fighting back. SPY Net Options Sentiment has been showing significant life near the end of the week, spiking aggressively toward the Bull Line. Just as we have seen in recent cycles, the rise in price is following right behind it.
SECTOR ANALYSIS
Looking at the 1 week data its very similar to the Cap Analysis, with Tech running away with it. The 1 week and 1 month return for the Tech sector is almost hard to believe. Luckily, we have been prepared for this thanks to our incredible QQQ NOS. Energy was the big loser this week with oil prices on the decline and all the inflows going into Tech. Utilities also have been struggling along with Healthcare.
PORTFOLIO STRATEGY
QQQ Net Options Sentiment remains in record territory and SPY is starting to show signs of strength. We will keep the portfolio bullish with 8 longs and 5 shorts.
Long / Bull Moves – BIDU, ACMR Add/ GOOGL, MSTR, UNH, RGLD, ASTS, GE Holds / NVO Drop
Adds
Adding in BIDU as it has been at the top of our screener and we wanted to get some China exposure. Adding ACMR for its high upside and NOS.
Holds
Our longs performed great last week and they all scored well again. GE is near the top of momentum score, MSTR with 90+ Net Ops, ASTS with 96 upside. We wanted to stay rounded with some Healthcare exposure and UNH leads our screener, same for RGLD in Materials and of course GOOGL has been leading the Mega Caps since earnings.
Drops
NVO was dropped as we wanted to lessen Healthcare exposure and add to our Tech to continue to take advantage of this run.
Short / Bear Moves – HTZ and GRMN Adds / VNT, BBY, NWS Holds and EVTC, UPWK Drops
Adds
HTZ was added as it is at the top of our screener with low NOS and 100 downside. GRMN was added for its low NOS and weak Tech Flow.
Holds
VNT was kept for its poor Tech Flow and high Downside, NWS was held for its low Net Options and BBY was kept for high Downside.
Drops
EVTC and UPWK were dropped as their momentum scores were rising after big drops to end the week.
Portfolio Summary
Long / Bull Moves – BIDU and ACMR as Adds / GOOGL, MSTR, RGLD, UNH, ASTS, GE as holds / NVO drop
Short / Bear Moves – HTZ and GRMN as Adds / BBY, NWS, VNT as holds / EVTC and UPWK as drops
8 Longs: GOOGL, MSTR, RGLD, UNH, ASTS, BIDU, ACMR, GE
5 Shorts: HTZ, GRMN, BBY, NWS, VNT
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