What kind of market are we in?
3/31/24 Prospero.Ai Investing (109th) Edition (Weekend)
Happy Sunday! Matt has the weekend off so an old school George letter today. So more numbers, less stories :) For the first time this week we will include a Market Cap and Value analysis.
As dominant as our year has been, the last few weeks have been tough for everyone to read so we are looking at a new approach today. Results are still very strong, beating the S&P 500 by 161% and a win rate of 66% against that benchmark
For newer readers linking our short intro + learning videos. As we do get a lot of questions I wanted to do a very quick run through of our products:
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What kind of market are we in? Outline:
Market/Macro Update with Special Cap / Value Analysis
QQQ Net Options Sentiment and Value and Growth returns by Market Cap
Sector Analysis
How we will form our Portfolio Management strategy from Sector movements
Portfolio Strategy
Using the above data to decide on the extent we want to be long and short and what the best ways to manage risk around Sector performance
Longs
Adds, Holds and Drops
Shorts
Adds, Holds and Drops
Portfolio Summary
Last week’s Net Options Sentiment levels from the 3/24 letter:
SPY and QQQ Net Options Sentiment > 40 = Bullish < 30 = Bearish.
QQQ returned -.53% this week vs .36% for SPY.
This isn’t a big surprise considering QQQ Net Options Sentiment has been showing more weakness when traditionally it runs higher than SPY. QQQ has been underneath it for months now. To make room in our letter for some additional analysis, we’re only going to post our QQQ chart this week.
SPY Net Options Sentiment has been boring and steady in the Bull zone, which as many of our readers know, is one of the big reasons that we switched to a more overall Bullish view.
For those that use the app you can see we’ve left a Bull Screener up now since 12/15/23. That is looking like a hell of a call. One of the big reasons we chose this, was the consistent strength of SPY Net Options Sentiment, which has been a mainstay in the 50’s all year long. At times last year, it had problems cracking 10, for extended periods.
So what about QQQ? We are actually seeing a nice recovery from the much scarier performance of the two weeks ago. That’s a welcome sight! But we are going to continue to remain cautious, especially in light of the trend in the graph below.
A few caveats before we make our point. Stocks like AVGO (a tech / AI favorite) is in VUG (Large Cap Growth) and META issued its first dividend, showing that big Tech might be looking more and more like a value play over time. Keep in mind, Large Cap Growth was the standout last year, due to the AI boom, while everything else looked equally bad or mediocre at best. But that has shifted over the last month. Clearly we are in some kind of Large Growth correction for at least a month. So the important question: “Is this the start of a larger correction? Just profit taking? Or Large Cap’s Euphoric rise just needing to be dampened a bit?”
Wall St. never wants to make it easy on you, I or anyone. And the more “euphoric” the markets get the more everyone starts hearing the devil in their head saying “you better start shorting this before someone else does and you lose profits.” It’s no small thing that we just crossed into Euphoria for the first time in a looonnggg time. That little piece of evidence makes our elevated base-level of caution ramp up.
SPY and QQQ Net Options Sentiment > 40 = Bullish < 30 = Bearish.
Sector Analysis
See Sector Analysis above. The pullback in Technology is a little harder to see in this view, partially because as we’ve discussed before, companies like GOOGL, META and TSLA are not in the Tech Sector. So sometimes the Large Cap Growth that we discussed above is a better way to analyze this information. We have seen this trend play out on Prospero’s QQQ Net Options Sentiment, and has shown signs of weakening for a couple of weeks now. Interestingly, as we saw above, small caps finally broke out of their multi month downtrend on Thursday and we saw them rally into Friday.
So the big question is, are we seeing a natural correction in Tech/ Growth / Magnificent 7 or is this a larger trend where they got overpriced and they had back towards a more “appropriate” value.
When you look over the last month, we also see an obvious movement toward Energy, Utilities and Materials and even Financial beat Tech and Communications. That is hard to ignore and we wont. Finally, check out Real Estate which cannot seem to decide if it wants to be Bullish or Bearish, the only stock that is positive on the 1W and negative 1M. Yet only Healthcare, Energy, and Utilities performed better on the week. To me this is a big sign of an uncertain market, that a stable asset like Real Estate seeing this kind of odd volatility. Bottom line…this market is all kinds of confused, and this is when we like to give our most consistent piece of advice. If you see people talking about what is going on as if they have a handle on everything, that's more than likely a sign of overconfidence than is appropriate. Why? Because honestly, this market is acting strange and NOBODY knows for sure what’s going to happen over the next days and weeks.
Portfolio Strategy
I’d like to leave you with two points that will form our portfolio strategy and you should strongly consider:
The market isn’t sending clear signals
The only clear signal it is sending is that there are concerns about the value of Tech / Growth stocks and are voting on that with their dollars.
So, we are pairing down our portfolio, and we’d recommend the same for you. 5 longs + REMX (rare earth metals) index and 4 shorts. Basically hard to ignore the overall Bull trend, but we need to take this recent correction seriously until we get more data.
Long / Bull Adds - Link to Below Picture
Long / Bull Moves - AVGO, BLK added / GOOGL, FANG, CEG hold / META, LLY, GE, NVDA, SMCI dropped
We wanted to get this more organized as we got some questions on it.
Adds
BLK and AVGO are by far the strongest stocks in signals + technicals. On top of that, both of them had a little extra incentive. BLK has the good performance of the Financials Sector. And I spotted AVGO in Vangaurd’s “Large Cap Value” VTV, which gives me confidence that it has more ETF purchasing protection than other, more growth-oriented stocks. That also explains why its technicals look better than other tech stocks as well.
Holds
GOOGL, FANG and CEG are holds because GOOGL, despite some tough Sector performance, is looking good and is a sleeping giant. We especially feel this way since Apple announced it might integrate its AI tech. So any day there is news on that, there should be a lot of upside. FANG and CEG look strong in Sector, Technicals and our Signals.
Drops
GE, NVDA, SMCI, and META were all dropped for Sector concerns. GE and META added technical concerns to that equation; as did LLY and was the toughest drop because Healthcare is looking stronger. But remember, we’re being careful and LLY trades at a high P/E, so it’s heavy on the Large Cap Growth underperforming category, and lighter on value. That’s what tipped the scales. Cap Growth underperforming category and lighter on value so that tipped the scales.
Short / Bear Moves - Link to Below Picture
Short / Bear Moves - RXT added / LPL, GETY, GL hold / PTCT, E, XRX, WISH, EURN dropped.
Adds
RXT was an easy target to add because we put AVGO in the portfolio (despite Tech concerns). So putting another Tech Bear in the portfolio made sense, and RXT had both bad technicals and Prospero Signals.
Holds
Next two sections are going to be pretty easy. LPL, GETY and GL were all held because they were the only stocks in the above Screener that had attractive Technicals and Signals for Bears.
Drops
PTCT, E, XRX, WISH and EURN were all dropped because of bad technicals.
Portfolio Allocation
6 Longs: CEG, FANG, GOOGL, BLK, AVGO, REMX
4 Shorts: LPL, GETY, GL, RXT