ZONE OF COMFORT VS. ZONE OF ACHIEVEMENT
7/28/24 Prospero.Ai Investing (141st) Edition (Weekend)
It was a wild week in the market where we saw some very unusual happenings. Everything from our QQQ Net Options Sentiment pegging at 0 (zero), to our CEO George Kailas recommending Bitcoin! Are these signs of the apocalypse? No. Not yet anyway. But, I guess it beats being bored!
In this newsletter, we're going to do our best to try to make sense of the craziness and volatility of last week and discuss what we feel we can learn from such an unusual week.
Let me start by explaining the title. I was talking to George about this last week, trying to get my mind around how crazy the market was (we saw the largest drop in the Nasdaq in a couple of years) and in the process of explaining to me his thoughts, he said the following: "Being in the zone of comfort, sometimes means you miss the zone of achievement" That sounded profound so I interrupted him and asked: "George, what do you mean by that? Explain what you mean that being in the zone of comfort can sometimes mean you miss the zone of achievement".
George began to tell the story about how famed investor Warren Buffett once stated one of biggest mistakes in his career was not investing in Amazon. He explained that as a value investor, Buffett did not invest in Tech. Because you did not know how much Growth was built into the price of Tech stocks. Bottom line, times were changing, and because the idea of investing in a company like Amazon was so far outside of his comfort zone, he passed on it, and missed the achievement of investing in one of the great success stories of our generation.
George went on to explain that we find ourselves in similar times today. In the fast-paced world of modern investing, things are always changing. Technology is playing a big role in how information spreads and affects the markets. This means that being able to adapt quickly and move with those changes is vitally important for success.
At Prospero.ai, we're all about staying on top of this fast-moving environment and bringing you along for the ride. We know that being able to adjust our strategies on the fly is key to thriving in this ever-shifting landscape. We understand that in today's world, where news spreads like wildfire on social media and influences how people feel about the market, being able to adapt fast is absolutely crucial and a huge part of how we approach investing. In the past, when information moved slower, you could take your time and get comfortable. But that approach today, while ultimately might still bring you a win, will often mean you miss out on the zone of greater achievement. Being able to interpret Prospero's signals and make fast decisions, is largely why we've gotten the returns we have in this crazy market environment. Yes, we make quick decisions. That is partly us feeling out the market, and partly because of how fast conditions change. But know this. We'll talk more about the specifics of this last week in the Macro section of the letter. But now a word from our CEO.
A WORD FROM OUR CEO
Up and down week that should shake out better as our COIN and CLSK holdings that we knew we’d be holding through Monday push us higher. We are beating the S&P 500 by 57% annualized, with a win rate of 60% against SPY benchmarks.
For newer readers linking our short intro + learning videos.
Normal streams this week! Monday 7/29 at 11 AM EST and Wednesday 7/31 at 3PM EST.
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ZONE OF COMFORT VS. ZONE OF ACHIEVEMENT
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 7/28 letter: SPY and QQQ Net Options Sentiment > 40 = Bullish < 30 = Bearish.
There are a couple things that stand out about this last week that are worth discussing. First, why we chose to enter into (and ultimately out of) Bitcoin, and two, why we think that QQQ has currently been flat-lined at Zero. First of all, throughout last week, even though the Nasdaq was falling off a cliff, Bitcoin miners like CLSK and COIN started showing some serious strength in Prospero's numbers. COIN was near max Upside + Net Options Sentiment (198/200) and CLSK was the top of our smaller cap screener. We pride ourselves on being open to whatever the signals tell us and the truth is we didn’t even know CLSK was crypto and we were overweight until after we were. But when we dug deeper we liked the story - Donald Trump was speaking at a large Bitcoin Conference in Nashville. There were rumors that he was going to make some wildly bullish comments and predictions about how he'd deal with Bitcoin if and when he was elected. Even as COIN and CLSK began to dip in price, George felt strongly that they would climb back. The metrics remained good and as any good investor would buy more as it went down because we had conviction and nothing changed in the signals. We even advised buying into Bitcoin itself on Friday. Sure enough, Bitcoin began to run. But as Trump began to speak, he didn't just hype his approach to Bitcoin, but also painted a gloomy scenario of what might happen to Bitcoin if his opponent Kamala Harris was elected. At the end of the day, that's what politicians do. But the Bitcoin reaction was interesting. As Trump articulated a disaster scenario if his opponent won, Bitcoin actually began to drop. Our theory is that it scared investors. The reality is that the polls are closer and people are more up in the air about who will pull out a victory. And Bitcoin sold off on the mere mention of the possibility that what Trump said might come true.
That is the case in point of what we talked about at the beginning of the letter. We live in a time, where information moves so quickly, that the direction of a "stock" can change in the course of a single speech. If you get comfortable, you might miss out on achievement!
The second thing worth discussing is how we saw Prospero's QQQ Net Options Sentiment drop to Zero and stay there much of the week. This a stark contrast to what we've been seeing over the last few weeks as QQQ NOS has stayed at historically high numbers. Why did it go to Zero? We have one primary theory…
Institutions are hedging against QQQ because of its volatility. If you remember, just a week ago, Donald Trump's comments on China made semiconductors fall off a cliff. They knew he was speaking at a massive Bitcoin conference and that his words can have staggering effects. Because Bitcoin, in many ways, is connected to Tech and QQQ, it's likely that institutions weren't betting against a drop in the entire market (SPY) but just against the currently volatile Tech Sector.
One final thought on this. To further prove that people are jumpy when it comes to Tech, remember how the market responded to Google and Tesla's earnings last week? Tesla's numbers struggled, but Google's were actually pretty solid. They beat in their top and their bottom line. But investors responded by selling. Why? Some slight lowering of forecasted numbers for next quarter. That's telling. A couple of quarters ago, when asked if AI was overvalued, the answer was a resounding "no". Now, when asked the same question, the response is "We're not sure…let's hedge just in case it IS OVERVALUED." META even had a bad day following Google’s disappointing YouTube ad revenue and that isn’t the same as META’s ad business, Bottom line, people are jumpy when it comes to tech and institutions are hedging against that volatility. This week we have some big names (Like META) reporting earnings. If the market responds with that same jitteriness, we could potentially see some more downside in Tech. We are playing this defensive.
CAP/VALUE ANALYSIS
Check out the table above. I think this table gives a pretty clear answer as to where we're placing our bets in the coming week. Smaller Caps. Small Cap Growth and Value are finally coming out of their historic underperformance compared to the S&P. While Large Cap Growth still performed well over a 3 month period, you can look at Large Cap's monthly and weekly numbers to see how volatile it's been. Unless things change dramatically, we'll continue to play defense, with most of our offense being played in the Small Caps world.
NET OPTIONS SENTIMENT
Check out the chart below. As you can see, our QQQ Net Option sentiment numbers as a whole are experiencing severe volatility. On top of that, it's trending in a severely bearish way. Our hope is that it's temporary and we'll see some stability in the coming week. Additionally our hope is that META and Amazon's earnings can save the day. But even though META is individually looking strong in our numbers, it's hard to be confident with our QQQ numbers sitting at ZERO!
See the graph above. While our SPY numbers have performed better than QQQ, you can look at the last few days and see the severe volatility as well as a bearish trend. The sharp decline on the 24th was due to some large companies that performed poorly in their earnings. This further highlights the market sensitivity right now to ANY and ALL perceived weakness. All of last week points to an overall bearish trend that merits defensive trading until we see sentiment turn around.
SPY and QQQ Net Options Sentiment > 40 = Bullish < 30 = Bearish.
SECTOR ANALYSIS
See the sector analysis table above. Tech and Communications had a rough month, which further demonstrates why the NASDAQ saw such a steep correction. Real Estate continues to bounce back and had a strong quarter. Market breadth continues to show signs of expanding as Industrials, Financials, Healthcare and even Utilities had a strong month. As we look to the coming week, it's nearly impossible to have a strong level of confidence in any particular sector. When it comes to this market, it seems like it can turn (either direction) on a dime. Please remember that every recommendation we make, we make because it shows strength in Prospero's numbers. But now, more importantly than it's been for quite awhile, let's not get too comfortable!
PORTFOLIO STRATEGY
We are definitely looking to pair down, especially after we are on the other side of our COIN and CLSK play. We will emphasize long smaller cap stocks and stay underweight on Tech longs until we get more clarity there. Definitely less than last week with 10 longs and 11 shorts and we expect that to be lower next week as we zero in on our strategy in this market.
Long / Bull Moves - Link to Below Picture
Long / Bull Moves - AMR, APLS adds / META, COIN (3/3), AMSC, CLSK (2/2), ROOT, ASTS (2/2) holds / MSFT, AVGO, TMDX, ASPN, SEDG drops
You may notice this has changed, intead of the technicals on the right we are rolling out our new signal Technical Flow. Which aims to sum up all technicals into one number and we will be leaning on it more!
Adds
The one thing we have started to see with consistency is smaller cap stocks are performing. So we lean that way with two of our best performing smaller cap stocks AMR and APLS. APLS is a bt lower on Upside but smaller cap stocks just run lower in that metric so we can accept that based on the exciting Net Options Sentiment trend.
Holds
COIN and CLSK were always going to be holds because of all the BTC price action over the weekend. We will decide on those as the market opens. META is back to looking dominant in short and long term signals as Short Pressure has also fallen. AMSC and ROOT, despite elevated Short Pressure look good as small cap opportunities still. ASTS has been on quite a run so hard to bail now but we will be quick to exit at least one position if we see a turn. AVGO was our toughest call but we held on because it had 100 Net Social Sentiment, always a nice tie breaker.
Drops
MSFT was dropped primarly due to low QQQ Net Options Sentiment we did not want to risk going long tech with that number staying low. TMDX was a hard drop but price and Net Options Sentiment went in the wrong direction Friday and APLS looked better in the Healthcare space overall. ASPN could well recover soon but it has been heading down too far and we found it too risky to hold. SEDG has been so up and down and the Screener performance is not cutting it.
Short / Bear Moves - Link to Below Picture
Short / Bear Moves - LCID, ENR, ASND, RAMP adds / JNPR, LPL, AAL, EVTC, WHR, SIRI (1/2) and DDS holds / HQY, ON (2/2), WOLF, CRI, ARW, CHH, MAS, LSXMK Drops (*Note DDS did not appear here because we did not generate a Technical Flow number)
Adds
LCID, ENR, ASND, and RAMP looked the best in the Sectors we were targeting. The only tough call was SQSP vs RAMP in the Technology space but when we zoomed in on the Technicals we preferred how RAMP looked in the shorter term momentum than SQSP.
Holds
JNPR and LPL were held because they were in a target Sector and looked great in the metrics. AAL was held because we still think it should have fallen more based on a disappointing earnings. EVTC goes ex-dividend on Monday so we thought that was a good reason to hold on for another day at least. WHR was held because we liked how it looked in Technicals flow and Net Options Sentiment. And we held 1/2 SIRI positions because it had such a bad Friday we wanted to hold at least one to see if it would continue.
Drops
HQY was dropped as it has been on too good of a price run recently and we wanted to cut our losses. WOLF and ON were cut because chips came back strong on Friday and we did not feel comfortable playing them either way. CRI was a tough drop but we preferred other Consumer Cyclical stocks. ARW, CHH, LSXMK and MAS were dropped because they did not perform well enough in the Screener.
Portfolio Allocation
10 Longs: META, CLSK 2X, APLS, COIN 3X, ROOT, AMSC, AMR, ASTS 2X, AVGO, ASPN
11 Shorts: JNPR, LPL, DDS, LCID, ENR, ASND, RAMP, AAL, EVTC, WHR, SIRI