The Anatomy of a Bull Market
6/24/24 Prospero.Ai Investing (129th) Edition (Weekend)
I recently read a popular book on trading, titled “Reminiscences of a Stock Operator”. Originally published in 1923, it tells the story of a young stock phenom who learned the ropes of trading from some grizzled, old veterans of Wall Street. One of the stories focused on when to sell and when to hold a stock that is going parabolic. One example as the Nvidia (NVDA) of the 1920’s was the automobile manufacturer, General Motors. In the US, the adoption of the automobile rose from 9.2 million cars in 1921, to 23.1 million by 1929. As you could imagine, the stock price grew exponentially. In 1921, GM’s Stock Price was trading at around $9, but then peaked at a whopping $111 before the crash of 1929. That’s a 765% increase in less than a decade.
The young man that was the main character of the book, purchased GM on one of its early dips and saw a substantial increase in just a few days. He sold for an extremely nice profit. One of the “Old Timers” was walking around the office and the young man asked the old guy if he’d sold and booked some profits. The older gentleman replied “Of course not young man, we’re in a bull market” What was the old man’s point? His point was that as long as the market is heading upward, your best odds of success are to leave the stock alone and let it ride.
Why do I tell you this story? Because this last week, one of our Discord members made an interesting statement about our QQQ and SPY Net Options Sentiment Numbers that I believe gives some insight into the genius of Prospero. The person said: “Seeing the QQQ Net Options Sentiment Numbers stay elevated, help me hold when I wanted to sell” Exactly!
We’re going to do something a little different today and put our QQQ and SPY Net Options Charts in the beginning of this letter to help show the genius of Prospero’s Net Options Numbers and how they can help you know when the tides of the market are shifting.
Look at the graph below. We intentionally zoomed out to show you how our NOS numbers inform our decisions.
Starting at the end of March, Nasdaq’s ETF (QQQ) began to dip from a price of $446 to $414 in the course of 8 trading days. Analysts from all over the country began to make the call, “The top is in! Time to short the market”. The price of gold went bananas and people began to purchase “safer” stocks in sectors like Utilities. But here at Prospero, our QQQ Net Options Sentiment numbers were telling us a different story. Our QQQ numbers, which had dipped into the 10’s (VERY Bearish) during the drop, all of a sudden reversed course and began to climb (rapidly) into the mid 40’s. That told us that institutions were bullish and putting their money into call options. Since that violent upswing in our QQQ Numbers, the price of the QQQ ETF rose from $414 to $485. With the exception of a violent downswing of our Numbers in early June (because of some bad economic data) our QQQ Numbers have stayed in a steady upward trend and have spent the last couple of weeks in the mid to high 50’s. As the person in the discord mentioned, this has helped us know “when to hold” and it’s paid off for us over the last couple of months as Tech has done incredibly well.
Now look at SPY Net Options Numbers. Look at the middle of May. We began to see a clear downward trend in our SPY Numbers, while our QQQ numbers were continuing to rise. This gave us the confidence we needed to shift to Tech. It was the right decision.
One final point on this. Look at around the 17th of June. There was a clear change of direction SPY Net Options Numbers to the upside. How did we respond? This helped us realize that SPY was strengthening, and we began to diversify our portfolio into other sectors other than Tech. Again, that was the right decision. Shortly after the upswing in our numbers, SPY broke out and reached another all time high for the year.
Why are we telling you this today? Because we want you to see (as they say), “how the sausage is made”. Part of our mission at Prospero is not to tell you what to do every step of the way, but to help you become a better, more informed investor and/or trader on your own. Our CEO George Kailas is amazing about giving us his time on Discord and helping people throughout the week. But his schedule is becoming busier and busier with speaking engagements and investor conferences around the world. However he does always make time to help especially new people learn how best to apply the signals for their experience, capital constraints and risk profile. You can always email him at george@prospero.ai to start your education. However, even though he and I speak often, in my more advanced education sometimes he will simply say “I know what I think about this trend, what do you think?” Our hope is that each of you would learn the nuances of the QQQ and SPY numbers for yourself. I promise you; it will be time well spent! I’ve grown by leaps and bounds as an investor AND have become somewhat of a trader interpreting/applying the signals on my own.
A WORD FROM OUR CEO
Was a volatile week with some twists and turns and we sit beating the S&P 500 by 92% annualized, with a win rate of 62% against SPY benchmarks.
For newer readers linking our short intro + learning videos.
Back to somewhat normal streams this week! The Monday 6/24 stream will be at 3 PM EST and Wednesday will be at the same regular time 6/26 at 3PM EST.
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The Anatomy of a Bull Market
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
Market/Macro Update w/ Cap/ Value Analysis
Last week’s Net Options Sentiment levels from the 6/17 letter:
SPY and QQQ Net Options Sentiment > 40 = Bullish < 30 = Bearish.
We continue to find ourselves in fascinating times. Two realities are occurring simultaneously. One, several extremely concerning economic indicators have triggered. While at the same time, the market is showing a strength only seen a couple of times in the last 150 years. Let me begin with some of the concerning economic data. Last week, credit card defaults from small lenders hit record levels, surpassing the peaks of both the Dot.Com bubble and Financial Crisis of 2008 peaks. Additionally, housing defaults hit their highest levels since 2011. Here’s one more. Median home prices are now contracting at recessionary levels. (Via @gameoftrades) Things are looking more and more like recession could be a reality sooner rather than later.
But at the same time, we’re seeing some fairly unprecedented bullishness in the market. Consider this; the S&P 500 has gone nearly a year and a half since it experienced a 2% daily decline. It has also recorded 56 new highs during that streak. Since 1928, there have been a grand total of 2 precedents of this happening. (Via @sentimentrader). Because our QQQ and SPY Numbers remain elevated, we will continue our bullish stance, but remain vigilant to watch for any shift sentiment.
CAP/VALUE ANALYSIS
This week we saw a shift away from Large Cap Growth and on Friday 6/21 Large Caps generally. We aren’t sure yet if this is an anomaly or the beginning of a larger trend. The hope would be that the market would experience growth in other sectors and the Bull market could continue on the back of other stocks besides Nvidia, etc. Interestingly, Value Stocks and Small Caps had a good week. Hopefully this is a sign of market breadth expanding. This week should be really telling.
NET OPTIONS SENTIMENT
QQQ Net Options Sentiment Graphs are at the beginning of the letter. But one interesting thing to note; QQQ Net Options Sentiment Numbers, while elevated, are not reaching new highs and look like they may be softening just a bit. On the other hand, SPY Numbers began to increase and converge upward last week, which will lead to us to broaden our portfolio.
SPY and QQQ Net Options Sentiment > 40 = Bullish < 30 = Bearish.
SECTOR ANALYSIS
We’re seeing some definite expansion outside of the Technology Sector. This is especially true for Consumer Discretionary who had a very strong week. For those that follow us, we’ve we have been picking on Consumer Discretionary shorts (successfully) all year, so the argument could be made there is value there or this could be a correction either way we are watching closely. Utilities is the reverse, after a strong start they continue to slump and had its worst month/week of all our sectors. Energy saw an uptick last week as well as Financials. Again, this could be a sign of market breadth expanding and it’s one of the reasons we saw an upward convergence of our SPY Net Options Numbers. We’ll continue to diversify our picks in these sectors and watch how Tech responds over the course of the coming week.
PORTFOLIO STRATEGY
While we continue to see QQQ Net Options Sentiment maintain stronger performance than SPY but, as mentioned previously, QQQ numbers may be stagnating while SPY numbers continue to grow. Therefore, this week we will be focusing on diversification with a balance in our long / short ratio to hedge our Bullish position on tech. We will take on 6 longs and 5 shorts but one of the longs will be a bonus pick with an explanation in our paid Section.
Long / Bull Moves - Link to Below Picture
Long / Bull Moves - BKNG, APOP adds / MSFT, GOOG, AVGO, SMCI holds / PDD, SMCI drops
Adds
BKNG was our only add this week. It has strong technicals and is ranked highly in our screener. As we mentioned Consumer Discretionary had a strong week and we are looking to diversify the portfolio making it a strong pick. APO looks very strong overall, especially considering the fact that 71.63 is very high Net Options Sentiment for a Financials stock.
Holds
We feel strong in our Bullish position on tech as you can see by our holds. MSFT is a hold due to strong technicals and high ranking in our screener. Although they were filtered out, AVGO has strong technicals and is tops in the Screener so we will hold it despite getting filtered out. We are holding GOOG because we liked its Net Options Sentiment trend more than META’s.
Drops
PDD is a drop this week despite its high ranking on our screener. Its technical performance is weak and it presented with a worse Net Options Sentiment trend than BKNG. SMCI is a drop due to our recent risk adjustment policy where we do our very best to hold only 1 stock that has been filtered out of the Screener.
Short / Bear Moves - Link to Below Picture
Short / Bear Moves - CALM, BOH and MGEE adds / DEI and KSS holds / AVT and DOCS drops
Adds
CALM is an add with good technicals and a high position in our screener. MGEE was added due to strong technicals and it is a good diversification pick since we are seeing Utilities continue to underperform. BOH was added both because we saw TWO Hawaiian banks on the Bear Screener list as well as a good trend in Net Options Sentiment and recent new Capital Markets offerings.
Holds
DEI is an obvious hold from a technical and screener ranking stand-point. KSS helps hedge the risk of our Consumer Cyclical long pick and diversifies our shorts.
Drops
DOCS is a drop because of how low it is positioned in our screener in addition to its poor technicals. AVT is dropped for the same reasons.
Portfolio Allocation
6 Longs: BKNG, MSFT, GOOG, AVGO, and APO Plus a bonus long with explanation in paid section below
5 Shorts: CALM, MGEE, BOH, DEI, KSS