THE SPY PARADOX
08/02/26 Prospero.ai Investing - 341st Edition (Weekend)
If you’ve spent any time around Prospero.ai and our weekly newsletters, you know we’re big fans of our SPY and QQQ Net Options Sentiment. Maybe more than any other part of our system, learning how to utilize those two data points has the power to revolutionize your trading and investing. In today’s letter, I want to give you a concrete example of how it just worked for us, how we should have personally paid more attention to it, and how there has been a fascinating anomaly that occurred over the last month that sheds some interesting light on the future of the market. So let’s jump in.
Early in the morning of June 23rd I noticed that our QQQ Net Ops had suddenly plummeted. I immediately sent out an alert over X.
Our QQQ Net Options Sentiment had been bullish for a while and we’d had a great June. But sentiment shifted bearish and it shifted hard. We’ve learned over the years that when you see that kind of sudden drop in QQQ or SPY Net Ops, you do well to pay attention. When QQQ declined 40 points overnight, it told us that institutions were no longer betting on market upside, but were paying heavily for downside protection via puts (option bet the market will go down); and they were doing it with urgency. I ran the data on how QQQ has performed since the market closed that day, June 23rd, until last Friday. Pretty fascinating stuff.
At the close of the market on June 23rd (Day of the Alert) QQQ was at $713.65. From that moment until the July 29th low, over a month later, QQQ dropped 7.2%! On July 2nd QQQ rebounded and made a high of $746. So if you measure from June 2nd to the market low on July 29th, QQQ dropped a grand total of 11.3%! Our options sentiment numbers saw that coming a mile away.
I’m going to talk for a second about what I’ve personally learned through this and other experiences when SPY and QQQ Net Options Sentiment drops from bullish to bearish single digits and stays there. I’ve learned that I need to immediately take profit and de risk. I have personally lost a significant amount of money over the last month because I didn’t trust our signals and I KNOW BETTER. This exact same QQQ/SPY Net Ops “Tell” happened last February. Our SPY Net Ops went to 0 and QQQ went to 4 and stayed there. The market over the course of weeks dropped double digits. I swore to myself that if it ever happened again, I would follow the rule of major de-resking (taking profit, no leverage, defensive posture, hedging with SQQQ or long dated puts). But I didn’t and I paid the price. Never again.
But that begs the question about the coming week. Towards the end of last week the market rebounded and growth stocks like $ASTS and $RKLB finally seemed to break their historic (yes, historic) downtrend. Well, guess what? QQQ Net Ops stayed pinned at 6 and SPY Net Ops is still at a historically bearish 0. And throughout the entire rally they never budged! Big Money is still VERY hedged against bearish uncertainty.
Now before I tell you what I think all this means, there is one very interesting anomaly that occurred during this drawdown that I think is very much worthy of our attention. Throughout the entire drop of the QQQ from late June to late July, SPY was actually UP 1.8% during that same time period. All that happened despite SPY Net Options being at 0!
When I saw that in the data I was shocked. What in the world does that mean and what in the world is going on? It’s impossible to know for certain, but more than likely what occurred is that around late June, smart money turned bearish on AI, chips and speculative growth names (see last week’s letter), but still felt like there was money to be made in beat up sectors and beat up tech names. Money didn’t leave the market, it rotated. During the month of July, SPY names like Cognizant were up +42%. Accenture +33%. Paypal +32%, Microsoft +24%. Those names are also in QQQ but their gains were not enough to offset the massive decline in chips and growth related tech. So SPY went up, but QQQ went down. And through SPY’s increase over our timeframe, SPY Net Options stayed at 0.
Here’s our thesis of why SPY went up, even though it’s net ops was historically bearish. You see, SPY is the number one most hedged ETF on the planet. When Big Money is facing macro economic and political UNCERTAINTY, they hedge by buying puts against SPY. Think about it like insurance. Big money bought insurance against an uncertain market by buying puts in SPY and QQQ, but then went long on beat up names Cognizant.
The takeaway from all this? Big money is STILL uncertain about the future. With bond yields rising and uncertainty around interest rate hikes, they aren’t removing their hedges, but they aren’t taking their money and running for the hills either. Our CEO, George Kailas made a good point on X last week. He said that at some point, stocks like MU and SNDK will become value plays and will be too hard to resist piling back in. Additionally some technical indicators like the McClellon Oscillator is showing tech to be near a technical bottom. There’s no guarantee, but it wouldn’t surprise me, if in the next several days we saw QQQ Net Option Sentiment turn bullish but SPY Net Ops remain at 0. That would indicate a flow back into tech, but big money remaining hedged because of the uncertainty on the broader market.
These are certainly interesting times we live in. One of the best things you could do in the coming week is don’t pile back into stocks until you see QQQ Net Ops (specifically) turn bullish and run back into the 40’s. But if you see it turn bullish. Probably a good time to employ some capital.
PERFORMANCE & WEEKLY RECAP
After getting caught in a few Friday afternoon Tech sell-offs over past weeks, we intentionally positioned for volatility ahead of time and the market delivered a strong finish to the week. Rapid rotation within sectors has made pinpointing individual stock moves tricky. While we want to capture upside, we refuse to turn this newsletter into a hyper-active trading desk just to chase short-term noise.
We stayed disciplined and stuck to our risk-averse earnings framework, which meant cutting SIMO and passing on AXTI. While leaving those gains on the table hurt in the short term, protecting capital remains our top priority. We have stopped the bleeding, and our disciplined approach continues to deliver results: we currently sit 4% below the market on an annualized basis, with a 56% win rate against SPY benchmarks.
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The SPY Paradox
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
With the month coming to a close, the 1-month trend reveals a clear institutional rotation out of duration and into cash flow. Across every market tier, Value finished the month in positive territory, led by Mid-Cap Value (+3.6%) and Large-Cap Value. Conversely, Growth suffered broad distribution over the past month, with Small-Cap Growth taking the heaviest beating at -6.9%. While the weekly view showed a brief end-of-month bounce in Large and Mid-Cap Growth, the broader trend remains intact: smart money spent July systematically de-risking away from high-multiple growth and anchoring into proven Value assets.
Outside of a brief single-day spike, QQQ Net Options Sentiment has remained stubbornly suppressed under the Bear Line. That early warning in NOS signaled the need to get on defense well before price followed suit down from the $730 peak. While price is attempting a short-term bounce, sentiment lacks any structural footing to support a sustained recovery. Until QQQ NOS establishes a definitive floor above the Bear Line, Tech remains locked in Wait Time and demands a cautious posture.
While SPY is showing brief signs of life to close out the month, Net Options Sentiment remains completely pinned at zero. Throughout late July, even when price wasn't dropping sharply, that flatlined sentiment maintained a steady downward weight on the broader index. We need to see NOS produce at least a few bullish blips off the bottom before feeling constructive about going more long on broad market exposure.
SECTOR ANALYSIS
Looking across the monthly timeframes, the inverse Energy/Tech trade we flagged a few weeks ago played out in textbook fashion. Over the past month, Energy (+12.1%) surged to lead the entire board, while Tech (-8.0%) suffered heavy distribution as institutional capital fled long-duration risk. Financials (+6.2%) and Healthcare (+2.5%) also saw steady inflows as smart money anchored into cash-flowing, real-economy assets. While late-week price action gave Consumer Discretionary and Communications a brief bounce, the broader monthly trend confirms a massive, structural rotation out of high-multiple Tech and directly into Energy and Value.
PORTFOLIO STRATEGY & SETUP
The market saw some positive momentum to end the week, but our Net Options numbers are still overall very bearish. As we head into a new month we cannot be confident that this upswing continues, so we are sticking with our core long positions and an extra short in case the Tech trade swings back down. We start the week with a slimmer portfolio of 3 longs and 4 shorts.
Long / Bull Moves – / MU, ASTS, CMPS, Holds / APP, NVO, CRWV Drops
Adds
None
Holds
MU was held for its very high Upside, ASTS was held for its high Upside and Net Ops, and CMPS was held for Healthcare exposure and steady Upside and Net Ops.
Drops
APP was dropped for its low Tech Flow, and NVO was dropped for its falling Momentum. CRWV was dropped for dropping Net Ops and Upside.
Short / Bear Moves – PK, HPQ Adds/ UAA, CRSR Holds / ARKK, WERN, SHOP, TRMB, AMAT Drops
Adds
PK was added for its low Net Ops and high Downside and HPQ was added for its low Net Ops and Momentum Score
Holds
UAA was held for its high Downside and low Tech Flow, and CRSR was held for its low Momentum Score
Drops
ARKK was dropped for its rising Net Ops, WERN, SHOP, TRMB, and AMAT were all screened out by our filters.
Portfolio Summary
Long / Bull Moves – / ASTS, CMPS, MU holds/ APP, NVO, CRWV drops
Short / Bear Moves – PK, HPQ adds / UAA, CRSR holds / ARKK, WERN, SHOP, TRMB, AMAT drops
3 Longs: MU, CMPS, ASTS
4 Shorts: PK, HPQ, UAA, CRSR
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