What Goes Up

07/20/25 Prospero.ai Investing - 237th Edition (Weekend)

Today we're tackling a question we hear being asked, maybe more than any other on social media and it's this: "Is the top in? After such a crazy bullish run, are we due for a pullback – or maybe worse?" The debate is quite literally raging across the world of Wall Street. To try and answer the question, we're going to look at some fascinating data, as well as discuss some potential catalysts that might cause the inevitable decline that we all fear might be facing us. But all this debate begs one more question, "why is everyone wondering if the top is in?" To answer, we could talk about the Buffett Indicator hanging out above historic norms. We could discuss the "Fear and Greed" index firmly entrenched in Euphoric greed. But one of the primary reasons we feel this is a legitimate subject to address, is that we just experienced a historic increase in the S&P 500. And when I say "historic", I'm not talking about when the world of Finance and Investing throws that word around to get people's attention – I'm talking about the fact that on Friday, we set a record for an S&P 500 price increase, over a period of 72 trading days. To be totally honest with you, I stumbled across that data by accident after getting the topic for this week's letter from our CEO, George Kailas. On Friday, SPY Net Options Sentiment spent some time at 0 and that got George's attention. As we talked, he expressed his growing concern that we might be approaching a market correction at some point in the near future. So, he asked me to write this letter on what might be some potential external catalysts that could trigger the market to correct. I decided to start my research by looking at how current stock valuations in the S&P compare to other all-time highs. What I found was concerning, but not nightmarish. Below is a chart that represents the forward price to earnings ratio of the S&P 500 going back to 1985.

What do you notice? The top white line is the 10 year average for the S&P 500 Forward P/E ratio. That average is 18.6. The current forward P/E ratio for the S&P is around 22.3. Here's why that matters. Since 1985, S&P forward P/E's have only jumped significantly above the 10 year average on 3 occasions:

#1 The late 90's– early 2000's Dot.com bubble.

#2 The 2020-2021 everything bubble.

#3 Right now as you're reading this letter.

Current stock valuations are breathing rarified air. Again, P/E's aren't yet at all time highs, but we're heading that way. In light of that, there's one concerning thing about that graphic. Each time P/E's got this bloated, a significant correction eventually followed. I went on a search to get my mind around when, and why these corrections began.

First, I wanted to look at the correction we just experienced in March and April. After a huge drop, I found out that The S&P bottomed, intraday on April 8th. From there, I calculated how much the S&P has increased from April 8th to last Friday, July 18th. Here's what I found. Over those 72 trading days, the S&P 500 increased +26.4%. And that ought to get your attention. Why? Because I started looking at how that +26.4% rally compared to other 72 day rallies in history. What I saw made my jaw drop. Ya'll, last Friday we broke a record for the largest 72 day S&P increase since my father was coming home from Vietnam! After I picked my jaw off the floor, I started doing research on how long it took AFTER the 72 day rally, for the market to have a 5% or greater correction. Here's the data…

• From April 8th, 2025 (market bottom), to July 18th, 2025, the S&P 500 rose from 4982.77 to 6296.79.

• That's a +26.4% gain over 72 trading days, making it the largest 72 day rally since 1975! (Could be longer, but I started measuring in 1950)

• The biggest 72 day, S&P rallies were as follows. (FYI, rallies from 2020 or before rounded to 25%, without a decimal)

RALLY END % INCREASE

July 18, 2025 +26.4%

June 9th, 2025 +25.7%

June 15th, 2020 +25%

May 29th, 2009 +25%

January 5th, 1999 +25%

October 21st, 1982 +25%

March 7th, 1975 +25%

NUMBER OF DAYS (after increase) UNTIL a 5% CORRECTION

Less than 1 Week 1 (2020)

Less than 1 Month 1(1982)

1-3 Months 2 (1975, 2009)

Greater than 3 Months 1 (1999)

We don't know yet 2 (June&July 2025)

To summarize 4 out of the 5 corrections happened in less than 3 months after a +25% S&P increase. Only 1, +25% or more rally occurred after 3 months. So we can reasonably expect, based on historic data, a correction could hit us within the next 3 months. But here's the main takeaway from all this. Every time AFTER the 25% run up, there was a catalyst that caused the subsequent correction. Stocks typically don't enter correction territory without a good reason. So, considering we just broke the record for the fastest 72 day run up in S&P history; what are some potential catalysts we need to be looking for that could potentially cause a correction?

1. Tariff-Driven Economic Disruption: the April 2025 "Liberation Day" crash demonstrated markets' acute sensitivity to trade policy, with the Nasdaq plummeting 14% in just 32 trading sessions. Current tariffs remain elevated at 54% on Chinese goods and 20% on EU imports, creating ongoing uncertainty about supply chain costs and global trade relationships. While markets have shown more resilience to tariff news during this recent rally, potential escalations with the EU or China cannot be ruled out. The trade war trajectory remains uncertain—we could see either further deterioration or resolution.

2. Persistent Inflationary Pressures: Inflation has accelerated modestly for two consecutive months, reaching 2.7% in June—the highest level since February. Rising import costs are beginning to filter through to consumer prices, and further increases could significantly unsettle markets.

3. Consumer Spending Weakness: Despite unemployment claims reaching a three-month low, consumers are showing signs of spending restraint. While June data exceeded expectations, the fundamental reality remains that the U.S. economy depends heavily on consumer expenditure. This spending deceleration, if continued, could serve as a negative market catalyst given consumption's 70% share of economic activity.

4. Credit and Debt Stress: Household debt reached an all-time high of $18.2 trillion in Q1 2025. Credit card debt presents particular concern, with 45% of Americans carrying balances averaging over $7,000. Credit card delinquency rates are rising, suggesting Americans may significantly curtail spending due to debt burdens. A market decline could create a negative feedback loop: increased demand for debt financing would further strain consumer spending capacity.

5. Federal Reserve Uncertainty: This week's market reaction to rumors about Jerome Powell's potential departure proved both revealing and concerning. While Powell's removal would theoretically enable more rate cuts (typically positive for markets), the negative market response suggests Wall Street recognizes that excessive easing in a strong market could create longer-term instability. Additionally, concerns about reduced Fed independence introduce systemic risk to market confidence.

6. Geopolitical Risk Escalation: Multiple global flashpoints continue threatening market stability. The Russia-Ukraine conflict persists alongside Middle East tensions, while U.S.-China rivalry intensifies through trade policy. European political stability faces ongoing challenges, creating persistent uncertainty about global supply chains and economic relationships.

Risk Timeline and Strategy

These catalysts operate on different timescales—some may develop gradually while others could trigger sudden market reactions. This uncertainty reinforces our recommendation for trailing stop losses to protect gains and limit downside exposure. Our analysis reveals no clear frontrunner among these risks. The trigger could be a gradual inflation increase culminating in one adverse data point, or it could be a sudden geopolitical event. Historical precedent reminds us of the market axiom: "what goes up must come down."

Specific Warning Indicators

Rather than simply advising caution and stop-loss protection, here are concrete metrics to monitor:

Market Stress Indicators:

• VIX surge above 30: Historical pattern indicating significant market stress

• Unemployment rate above 4.5%: Would trigger recession probability models

• Consumer spending declining for consecutive months: Current weakness could signal broader economic deterioration

Earnings Growth Concerns: Current S&P 500 earnings growth consensus projects 8.5-9.3% for full-year 2025, revised down from 12.7% six months ago. Q2 2025 earnings growth expectations have decelerated to just 5.6% year-over-year—potentially the lowest since Q4 2023 (4%). While we remain optimistic that AI and Big Tech could lift broader market performance (explaining QQQ's current strength), soft Q2 results showing below 5% year-over-year growth would warrant position trimming, particularly in non-AI sectors, before this potential drag on optimism intensifies.

To summarize…

The good news: markets are ripping. We're breaking growth records (2 in 2 months). Valuations are high, but not the highest in history. Earnings are currently strong. Institutions are still bullishly positioned in tech. So, we could absolutely have more upside to go!

The bad news: +26.4% rises in the S&P 500 have historically led to corrections. On top of that, stocks valuations are significantly over their 10 year average. The economy is steady but showing some cracks of weakness. Finally, many of the catalysts that could trigger a correction are beginning to rear their ugly head. Bottom line, play the upside, but absolutely, please, stay on your toes and don't get over leveraged. History tells us a correction is coming; and the odds are that it will be sooner rather than later. Now a word from our CEO…

A WORD FROM OUR CEO

In case you missed our first half review: How we beat the S&P500 by 81% 1H25

We have been pushing the right buttons on longs and shorts and our paper trading portfolio is back up to 91% above the market annualized with a win rate of 61% 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.

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What Goes 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

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CAP/VALUE ANALYSIS (Link to Table)

Large Cap Growth and Mid Cap Growth continue to dominate the field, up 1.53% and 2.01% respectively on the week, and boasting strong 1-month returns of 6.86% and 6.21%. Both categories are carrying serious momentum off massive 3- and 6-month moves, reflecting persistent flows into high-quality growth. In contrast, Value remains tepid, with Large Cap Value and Mid Cap Value effectively flat over the week and underperforming across all timeframes. Small Cap is mixed—Growth posted a decent +1.40% this week, but Value slipped -0.33%, highlighting continued skepticism toward cyclicals and rate-sensitive names. The growth–value divergence remains intact, and the longer-term returns underscore it: Mid- and Large- Cap Growth are up over 20% in the past year, while Value sits well below 10%, the closest being Large Cap Value at +6.85%.

SECTOR ANALYSIS

Technology continues to power higher with a +1.97% gain this week and a scorching +7.98% over the month, extending a 3-month surge north of +38%. Communications remains strong in the longer term, with slower, but still solid weekly and monthly returns, aided by continued strength in platform and AI-adjacent names. On the defensive side, Utilities showed surprising strength, up +1.58% on the week and +3.96% over the month, possibly as a hedge amid elevated valuations elsewhere. Financials and Industrials held up moderately well with weekly gains near or just under 1%, and Energy remains the major laggard, plunging -3.56% on the week and sitting negative across all except one timeframe, weighed down by weak crude prices and macro concerns. The total return picture makes the trend clear: Technology leads broadly, while Healthcare and Energy are firmly in the red.

SPY/QQQ NET OPTIONS SENTIMENT

SPY has extended its gains this week, with price continuing to press into new highs while NOS remains pinned in bearish territory. While shorter-term activity has seen modest choppiness, the past couple weeks show a clear hesitance from the options market to fully chase the rally, suggesting elevated expectations for a near-term correction. Despite this, the consistent divergence between rising price action and suppressed NOS reflects strong underlying bullish momentum, with the lack of call chasing potentially providing fuel for further upside.

QQQ continues to charge higher with conviction, bolstered by a surge in NOS that now sits firmly in bullish territory. The past couple weeks show strong, sustained bullish positioning, suggesting that traders are not only chasing the rally but reinforcing it. This sharp contrast to SPY’s more cautious sentiment profile highlights QQQ’s leadership in this market cycle. With both price and sentiment aligned to the upside, QQQ remains a momentum favorite with less risk of sudden reversals—at least while this enthusiasm holds.

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PORTFOLIO STRATEGY

With 10 long positions and 9 shorts, we’re keeping the portfolio nearly balanced but leaning slightly bullish as broader indices remain resilient. The long side mixes high-conviction tech names with momentum-driven plays in Energy, AI, and infrastructure, allowing us to stay exposed to upside catalysts without overcommitting in any one area. On the short side, we’ve focused on names showing clear technical or fundamental weakness, especially in Financials and Industrials, to hedge against volatility or any macro-driven pullbacks. This positioning keeps us flexible and ready to pivot depending on how earnings and macro data shake out in the days ahead.

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Long / Bull Moves

Long / Bull Moves – BABA, AMR, CCI Added / META, APP, HOOD, PLTR, AMD, IREN, AVAV Held / NVDA, GS, RKLB Dropped

Adds
BABA makes its case with strong upside (83.10), near-perfect options sentiment (98.32), and a healthy momentum score (75.73), suggesting traders are betting on a recovery despite prior volatility. AMR re-enters the radar with a technical score recovery to 35.20 and solid sentiment (74.21), while maintaining strong EPS/sector positioning and having great profitability/growth metrics. Rounding out the adds is CCI, supported by a balanced blend of options interest (80.57), technical flow (78.67), and fundamental stability. All three show enough upside breakout potential and bullish momentum to justify inclusion.

Holds
META retains its #1 screener rank despite only moderate momentum (62.96), held aloft by near perfect Upside and Net Options Sentiment. The rest of the hold group, while not currently favored for accumulation, still posts strong enough sentiment and upside potential to avoid being cut. Names like HOOD and PLTR, for example, feature sky-high scores in Upside, Tech Flow and Options Sentiment, while AMD continues to show dominant technicals and options activity, justifying patience amid market churn.

Drops
NVDA loses ground primarily due to an erosion in profitability-growth (67.49) and faltering momentum (59.77) reducing its total score despite impressive technicals. GS sees sentiment fade alongside weakening breakout potential, pushing it below the current filter thresholds. RKLB rounds out the exits as its scores soften across the board — sentiment, momentum, and growth all took a dip, disqualifying it from further inclusion until conditions improve.

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Short / Bear Moves

Short / Bear Moves – SLG, MTG, FORM, SABR, RYAN, NOK, HOLX, FTV Added / CRWV held / WAFD, MKC, MANH, EEFT, DOW, OTIS, MU, MMC, DKS Dropped

Adds
SLG, MTG, and FORM all show weak setups, with low Momentum Scores of 26.61, 36.42, and 28.87 respectively. SLG stands out with a particularly poor Technical Flow of 21.83 and a massive drop of -62.69 in total score, signaling limited upside and persistent downside pressure. MTG is weighed down by low growth and a sharp drop in Options Sentiment to 30.22, while FORM struggles with a weak Profitability/Growth score of 27.90 and a limited upside path. HOLX and FTV round out the group, both showing clear short-side setups with total scores of -136.36 and -138.23. HOLX has a weak Options Sentiment of 16.58, despite a decent technical base, and FTV shows consistent deterioration in both technical and profitability metrics, with a notably poor Downside of 61.92.

Holds
We’re holding onto CRWV, which continues to drift lower without much buying pressure. There’s been no sign of a real bounce yet, so we’re staying in the position until we see a reason to change course.

Drops
WAFD was dropped due to MTG being a better smaller cap Financials options. And MKC, MANH, EEFT, DOW, OTIS, MU, MMC, and DKS were all dropped due to poor screener performance.

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Portfolio Summary

Long / Bull Moves – BABA, AMR, CCI Added / META, APP, HOOD, PLTR, AMD, IREN, AVAV Held / NVDA, GS, RKLB Dropped

Short / Bear Moves – SLG, MTG, FORM, SABR, RYAN, NOK, HOLX, FTV Added / CRWV held / WAFD, MKC, MANH, EEFT, DOW, OTIS, MU, MMC, DKS Dropped

10 Longs: BABA, AMR, CCI, META, APP, HOOD, PLTR, AMD, IREN, AVAV

9 Shorts: SLG, MTG, FORM, SABR, RYAN, NOK, HOLX, FTV, CRWV

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