Tech troubles, on the LAM (Research)
2/19/24 Prospero.Ai Investing (98th) Edition (Weekend)
Prospero continues to have incredible outcomes this year. We are currently beating the S&P 500 by 379% with a win rate of 70% against that benchmark.
Special Update: There’s an old slang phrase from the 1800’s called “on the lam”. It means to be “on the run”. We are dropping a big winner SMCI and adding LRCX (Lam Research Corporation) in a similar business. Stay tuned for more!
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Tech troubles, on the LAM (Research), Outline:
Market/Macro Update
QQQ and SPY Net Options Sentiment
Sector Update / Portfolio Strategy
Now the Sector analysis will be roped into our allocation!
Longs
Adds —> Keeps —> Drops
Shorts
Adds —> Keeps —> Drops
Portfolio Summary
Last week’s Net Options Sentiment levels from the 2/11 letter:
For Tech: QQQ Net Options Sentiment > 40 = Bullish. < 30 = Bearish.
For Non-Tech: SPY Net Options Sentiment > 40 = Bullish. < 30 = Bearish.
QQQ returned -1.48% this week vs -.34% for SPY this week.
The title track of Bob Dylan’s 1964 album release was called, “The Times They Are A-Changin”. The song was speaking about a massive cultural shift occurring in the United States and around the world. When you look at the QQQ and SPY returns for the week, it might be time to start humming along. As a matter of fact, all 3 indices (including the Dow) broke their five week winning streak. According to the CME FedWatch tool, the odds of a 25 basis point rate cut by the Fed in March is now at 11%, versus 16% a week ago. This is also a 63% decline from a month ago. This shift is starting to be seen in our SPY Net Options Sentiment.
Look at the graph below. SPY Net Options Sentiment performed extraordinarily well in late January, keeping a sustained number in the high 50's for last two weeks of the month. At the beginning of February, we began to see a weakening trend that has been sloping slowly downward until Thursday and Friday of this week where the trend accelerated, reaching the lowest numbers we've seen since early January. This is highly concerning to us, that a bearish correction could be coming soon.
QQQ Net Options Sentiment showed more strength throughout the week. Every decline to the downside was met with a quick reversal, EXCEPT on Friday, which saw a small decline into the mid 40's that held until the market closed. QQQ's strong performance could continue into NVDA's earnings on the 21st. But with SPY Net Options Sentiment showing weakness and/or a less than expected earnings report by NVDA, could cause things to turn to the downside in a hurry.
For Tech: QQQ Net Options Sentiment > 40 = Bullish < 30= Bearish.
For Non-Tech: SPY Net Options Sentiment > 40 = Bullish < 30 = Bearish.
Sector Analysis / Portfolio Macro Strategy
Look at the Sector Analysis graph and you'll notice that Communications and Technology experienced a week that was significantly lower than its average. Over the last year, Technology and Communications never got pushed too far down, so this could be an anomaly, or an indication of a softening trend. Our guess, is the answer to that question, will be discovered on Wednesday when NVDA reports its quarterly earnings. Additionally, Energy had its best month in quite awhile. And while the week after Feb 16 OPEX (options expiration week) is seasonally low for Energy, that typically changes as we head into Spring and an uptick in consumer travel. We're also seeing an overall softening trend in Consumer Defensive. Retail sales fell 0.8% M/M in January, significantly more than the expected 0.1%. This could be indicative of a January holiday hangover, or could be a sign of a more ominous economic decline. One final but interesting area to note, is the Materials Sector. Materials had a fairly sharp increase over the last week. The price of oil, copper and gold all rose over the last few days. There are several reasons that could occur, but one of them could be speculators buying in advance of a sharper period of growth. It is time to begin buying Materials stocks? We think so. We will add at least one materials company to start the week.
Overall we see 5 longs we like and 4 shorts. But we will exit MELI quickly if it starts the week off poorly.
Long / Bull Adds - Link to Below Picture
LRCX (Lam Research) is an add. Bottom line is that its growth is pretty impressive, while sporting a lower 2023 and 2024 P/E ratio than SMCI. With the rise of SMCI price raising it’s P/E and lower Short Pressure for LRCX along with better technicals. When we dug in, it was an easy decision. The value pick for P/E gives an edge to LRCX (27 2023 P/E and 32 2024) over SMCI (74 2023 P/E and 41 2024) giving it the better return potential in the short term AND a higher floor.
EXP (Eagle Materials) is an add. We mentioned in our Sector Analysis that the Materials sector is showing signs of strengthening. When you factor in that, plus EXP’s earnings growth and its strong looking technicals, we feel like it’s our easiest choice this week.
Long / Bull Keeps
MELI is a keep, and returned 1.52% vs -.34% SPY benchmark. MELI reports earnings on Feb 22nd of this week.
ETN is a keep, and returned -0.16% vs -.34% SPY benchmark. We think Industrials is a solid Sector right now and this is the best pick.
LLY is a keep, and returned 5.66% vs -.34% SPY benchmark. This has long been a Healthcare favorite of ours that continues to perform well.
Long / Bull Drops
META is a very tough drop but the Short Pressure is too high, combined with Communications being the worst performing Sector 1D trailing we want to get out now at close to a 20% gain and reassess a re-entry soon. Covered 1/30-02/16 and it finished 18.03% with a Win, Beating the SPY benchmark by 16.6%.
TSLA is a drop because it doesn’t wow us in the Screener. Covered 2/13-2/16, and it finished 4.46% with a Win beating its SPY benchmark by 4.32%.
SMCI is a drop, just too risky with a 20% loss on Friday AND LRCX showing better P/E numbers even with that drop. Covered 1/30-2/16, and it finished 54.58% with a Win, beating its SPY benchmark by 52.93%.
Short / Bear Adds - Link to Below Picture
Short / Bear Keeps
ICLK is a keep and returned -0.52% vs -.34% SPY benchmark. Top of the Screener no reason to move!
NAVI is a keep and returned 0.62% vs -.34% SPY benchmark. Happy with the technicals here and think we can move it from a Loss to a Win.
SWX is a keep and returned 1.12% vs -.34% SPY benchmark. We like it as the best Bear in an underperforming Sector, as an underperformer in that Sector. Margin of safety feels good.
ESCA is a keep and returned -6.94% vs -.34% SPY benchmark. We like Consumer Discretionary as a target again for Bear movement and this is the best pick.
Short / Bear Drops
LEG is a drop because it is just too low in the Screener. Covered 2/16 - 2/16 returning -.65% and is a Win beating its SPY benchmark by 0.84%.
Portfolio Allocation
5 Longs: LRCX, EXP MELI, LLY, ETN
4 Shorts: ICKL, NAVI, SWX, ESCA