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Big Rally. First Sell Signal Since April | Katie Stockton on What the Charts Say Could Come Next
00:52:06
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- [00:00]
Katie Stockton
So we've upheld that 6880 objective kind of throughout the summer months and now into the fall. And we feel that that's still a very relevant price objective. If the VIX were to shift out of what has been really just a range up above about 18, it would clear some resistance. And that would be another suggestion that we're getting into kind of a pullback mode or consolidation phase that is meaningful enough that investors might want to temporarily reposition or get hedged. We may see a consolidation phase or a corrective phase unfold. So that's the kind of thing that we'll be on the lookout for with this sell signal that has arisen. There's some really, really steep up moves out there within the AI theme that has been so strong. But by no means would I see a correction as something that would mark the end of that theme. Um, you know, it maybe could be the start of a more discriminatory environment as it pertains to the fundamentals of these companies.
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Host 1
Today.
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Host 2
We welcome back Katie Stockton, founder and managing partner at Fairlead Strategies, an independent research investing firm specializing in technical analysis and tactical investment strategies. And you also serve, Katie, as portfolio manager on the FairLead Tactical Sector ETF ticker symbol TAC. Hi Katie, thank you for joining us.
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Katie Stockton
Great to be back with you guys.
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Host 2
Like we always like to do with you. We're going to dive into the technicals. We'll look at some of the areas in the market where you're seeing some strength and also some weakness. There's going to be a bunch of charts in this episode, so if you're listening on audio, you might want to pop over to YouTube to get the most of it. We'll look at some sectors, other asset classes and just kind of think about what it means for investors as we get into sort of last part of the year here. But before we start, we wanted to mention, we appreciate this, Katie, that Fairlead Strategies was kind enough to offer our listeners a free 30 day trial and 20% off your basic investment research plan or package. You can go to the link below fairleadstrategies.com trial and use the code excess returns and check out to receive that discount. So really appreciate you giving us and our audience that.
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Katie Stockton
Of course, I'm happy to. Great.
- [02:22]
Host 2
So let's just talk. We'll, we'll, we'll get to charts in a second. But just maybe at a high level, what's the current technical setup that you're seeing in the market today?
- [02:30]
Katie Stockton
I mean, It's a very strong bull market for equities. As you know, just looking at the S&P 500, which really is our primary benchmark, as much as it can be perhaps criticized for the concentration of the mega caps, it still is what we all use as our market proxy. So very strong bull market really almost uninterrupted in terms of the uptrend off of the April low. And that's what's remarkable about it. It just seems like we have not looked back since then. Barely a pullback that's lasted more than a couple days at a time. And so in a way that has people on edge, you know, sentiment wise, it could certainly be more extreme, meaning that we don't have this, this overly bullish sort of posturing right now necessarily, despite the fact that we have new all time highs from the S P. So we don't have a big warning sign there. But we have a lot of risk metrics that we're watching to suggest that things have changed or are changing. And to that end we're watching things like the 20 day moving average as it pertains to the S&P 500. As long as it's pointing, pointing higher, well, that's a good thing. And, and when it rolls over, very simply, that's not a good thing perhaps for short term investors or traders and then for the vix, which is a read on market sentiment. If the VIX were to shift out of what has been really just a range up above about 18, it would clear some resistance. And that would be another suggestion that we're getting into kind of a pullback mode or consolidation phase that is meaningful enough that investors might want to temporarily reposition or get hedged. So that's what we've been looking at. For very simply, there has certainly been a loss of market breath really more evident over the past three weeks or so. But that doesn't mean we have a lot of breakdowns or anything to suggest that we're, you know, moving into any kind of cyclical down move.
- [04:26]
Host 2
I want to look at the S and P in more detail in a second because you have an interesting chart with obviously the main moving averages that you're looking at. But I just thought it would be helpful for our audience. Can you just talk through, you know, maybe a few of the key indicators that you actually use in your analysis and what they're actually measuring?
- [04:44]
Katie Stockton
Yeah, of course. So the way I sort of differentiate the indicators is by what they're trying to help us conclude. So we are looking for A read on trend obviously. So trend following metrics, which we would say are synonymous with momentum indicators. So trend trend is obviously our biggest input as technicians. We're also looking for whether that trend might be exhausting itself. So this would be for the overbought oversold takeaway. And that's a whole other category of indicators, also price based. So it's all price based analysis. And when we look at charts, we're looking at not only those indicators, so prevailing trend following gauges and overbought oversold metrics, but also support and resistance levels. So it's not really an indicator, but it is part of our methodology that's really important in that it helps us discern what the risk reward profile may be, you know, where buyers have stepped in, where sellers may step in, that type of thing, and whether there's a breakout or a breakdown, some kind of technical catalyst. And we're always out there looking for technical catalysts. So that's a big part of our process, is to scroll through these charts and look at the indicators, look at these key levels and come up with a conclusion based on all of that. We also are referring to relative performance and that is just simply derived from ratios of price to price. So looking at something like maybe intel relative to the S&P 500, we'll, we'll try to understand is it outperforming, underperforming, does it, the ratio actually have a breakout just like price does? That will be good information to have as well. So the relative strength is another input that we pay attention to, albeit not typically on the primary chart that we're using. And we're using all of this across multiple time frames. And this is almost the hard part because we are letting that sort of long term view that we get from a monthly bar chart inform the short and intermediate term takeaways from the indicators. So it's almost like looking at all these tools all at once over multiple time frames. Sounds pretty complicated, but in reality it's very visual and you kind of get into a rhythm when you're doing that. And we'll even scroll through the whole host of charts every morning to get new ideas, new ideas for what we're writing in our research.
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Host 2
So here we have the S&P 500, you have the 20 day moving average is the blue line, the 50 day is the green line, and the 200 day is the purple line. Hopefully I'm not colorblind here and that's the way it is. But just talk to. So with the 20 day being above the 50 day and the 50 day being above of the 100 day, like that's kind of a bullish that to your point earlier, that's sort of indicates the strong market momentum here.
- [07:33]
Katie Stockton
Yeah, I mean listen, moving averages are one of the best ways to isolate primary trends over different time frames. 20 days obviously pretty short term timeframe. So we just want to see it pointing higher. It's even better if it's pointing higher above the 50 day and the 50 days above a longer term moving average as well. But we're not too into the crossovers there. We're more about the slopes of these moving averages and that's just a matter of preference. There's some folks that will definitely act upon moving average crossovers. But at to that end we use the macd, which is the moving average convergence divergence indicator and it's a primary trend following input for us. So we have the macd, we will use it, you know, sort of in conjunction with the moving averages for a takeaway. So that blue line pointing higher is key to the takeaway right now because unfortunately the daily MACD indicator has been super noisy. And that's just the characteristic of the market right now. And it's also why, you know, we can't always just set it and forget it in terms of our methodology. You can't always rely on exactly the same tools in different environments.
- [08:47]
Host 2
What is the secondary support line? Is that what the market, if it were to pullback it would? You know, if you take a static snapshot today, that would be support or what is that indicating?
- [08:58]
Katie Stockton
Yeah, so if you think about support as just a potential area of buying pressure and there's so many ways to discern that, but a moving average could be one. The secondary support for the S P that we're watching is actually a former resistance level. So it's like when a peak becomes a potential place for buyers to step in. It's the psychology there is that if you see a breakout above that former resistance area, which is 61, 28 for the S and P, if you see a breakout above that, while folks that feel like they missed out on that move, of which we've had a pretty substantial move since then, of course they would be very eager to buy closer to that level. Right. So it's a, it comes from market psychology that these levels actually make a difference on the charts. So it doesn't mean we're going to go see that level tested. And so they don't act as magnets per se. But if we were to see A loss of momentum, then we would at least have a way to understand where buyers might step in so that that's what it's there for. It's to help us understand what downside risk might be if we do see a loss of momentum and also to suggest where we might look for buying.
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Host 2
And just one more question on the chart. So would you say that it would have been around that sort of maybe early May to mid May time period when those shorter term moving averages started to trend up, that you're, you would have started to become more positive and productive on the market? And I guess what I'm trying to get at here is like how do you, you know, kind of wrestle or balance, I guess the sort of what can be short term indicators versus maybe, you know, long term indicators in a longer term trend?
- [10:40]
Katie Stockton
Yeah, for sure. I mean, listen, the, the April low actually had a bunch of these overbought oversold metrics kind of blowing up in this oversold extreme. So thankfully we were able to help our clients get exposed again closer to that April low than the moving averages would have warranted. Moving averages by their nature are going to be, you know, lagging price. Right. Because that's the way they're, I guess, calculated. So we don't want to necessarily use that as a market timing device per se in that sense, but we do want to use it as a trend following input. From a market timing perspective, we have multiple ways of getting close to lows and highs. And it can look like either a stochastic oscillator, which is an overbought oversold metric rolling over from 80%. It could look like a Demarc signal from Tom Demarc's indicators that tend to gauge trend exhaustion one way or the other. In fact, we had one of these counter trend buy signals from the demarc indicators within a day of the April low. So there's ways that we can get closer to the lows and the moving averages will allow. But the moving averages still serve a very important purpose in that they tell us if it's a strong uptrend or well established trend or not. Or is it just maybe a relief rally or oversold bounce. Once they turn, you can feel more convinced that that trend has taken hold. So it's almost affirmation of the importance of the turnaround that, that we saw back then.
- [12:15]
Host 2
Does your, I'm just curious, like coming into September, you know, we were hearing about, we were coming into like what was historically a seasonably weak time for the market. And yet I Think the S and P was up like three and a half percent in September and it was the fifth consecutive month it was up. So how do you, I mean when, when the market defies sort of seasonal patterns and timing, things like this, do you think of things any differently or how do you view that?
- [12:38]
Katie Stockton
You know, it defies the seasonal patterns often, especially the more that you zoom in on these narrow time frames. So from the monthly returns historically for the S and P, September on average is, is really the worst and it's, it's fairly consistent. But there's definitely some big up months in there too. If you zoom out a little bit to the quarterly seasonal work, you can see a bit more of a reliable trend there, obviously encompassing three months as opposed to just the one. So we do rely on these things for information, but we're never going to make a recommendation based on seasonals. We're going to let it help inform whether we're giving say a MACD cell signal more or less weight or a breakdown or breakout, more or less weight. So influence. Without being the sole source for our market timing for this move, we just kind of focused on the 20 day throughout September. And I think it influenced us in a way that we have not been keen on recommending new long positions except where there are new catalysts. Right. Like we're willing to buy, say a breakout, but we're not really willing just to buy a stock that looks like The S&P 500, frankly, like something that's been trending higher steeply with no new catalysts. So it's definitely toned us in that way that we're not aggressively saying just add exposure blindly. We've been more selective with that recommendation. So you see how it can kind of nuance what we're looking at in the indicators. We know also that in the same way that seasonal influences don't necessarily hold true year after year, it's also dangerous at times to rely on historical long term correlations as well. So we're not ones to say, okay, well if gold is doing this, then Bitcoin has to do this, that the dollar has to do this because these correlations will break up at times, sometimes in a landscape shift or sometimes just because investors are focused elsewhere, who knows? So we don't rely on those long term correlations except for long term takeaways. Right. So I think that's a good way to kind of frame the seasonals.
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Host 2
Yeah. And I guess just lastly on the S and P, is there anything, what would you be paying most attention to that could possibly have the biggest impact on you sort of changing your stance.
- [15:10]
Katie Stockton
On the S P. Well, between the moving averages and the crossovers. Right. You know that looking at the crossovers in the macds, things like that. And we're always going to focus on the indicators above all. And we do have a new sell signal this week on the S&P 500 from the DEMARC indicators. So one thing that we'll be watching to suggest that we're getting into a corrective mode would be for confirmation of that signal in particular and then to the upside. We're just kind of riding the trend at this point. The breakout that we saw in June which lifted the S and P to new highs was, you know, a bullish catalyst, right. From like an intermediate to long term perspective and allowed for what we call a measured move price projection of about 6,880. So we've upheld that 6,880 objective kind of throughout the summer months and now into the fall. And we feel that that's still a very relevant price objective. It's really not that far from current levels anymore. It used to feel pretty far away, but now it's seems to be more within reach. And it's been our objective for early 2026, just by the nature of the uptrend and its slope. And I think that's where we just are going to continue to focus until the market tells us otherwise. We, we can't predict where the market will be at any given time, but we can just put more probabilities in our favor and that's what we're trying to do.
- [16:35]
Host 1
Well, speaking of putting probabilities in favor, it's interesting you say that about the S and P because I think we're going to get this NASDAQ chart up next. We're seeing some intermediate term negative single signals on the NASDAQ here too, aren't we?
- [16:49]
Katie Stockton
That's right. So the NASDAQ 100 got the signal before the S&P 500, which really has it as of today. So these are signals that bear watching. They become higher conviction when they're confirmed. And for the demarc indicators for those who follow them, there are like very specific metrics that allow for confirmation. So we'll be watching for those not to get too deep into it, but it effectively requires a loss of momentum. Right. So to simplify, we could say just watch that 20 day or something, maybe even a little bit tighter for those that are more short term in their orientation. But we do have what I would call is our first counter trend indication since April Low was established on this weekly demarc indicator. And you know, that just tells us we're probably a little overdone. And it suggests that for the next nine weeks, it has implications for about nine weeks, we may see a consolidation phase or a corrective phase unfold. So that's the kind of thing that we'll be on the lookout for with this cell signal that has arisen. So it's a matter of combining that input with the momentum gauges to arrive at a more powerful conclusion. Nasdaq 100 has obviously outperformed this year. It's been helped by its technology, heavy exposure, but the ratio. So looking at the NASDAQ 100 or even a technology sector proxy or a mega cap stock proxy, the uptrends in those ratios have lost some momentum. So that would be another factor that would be kind of a takeaway to suggest that we'll get into a consolidation phase. Because as you can imagine, as soon as the S and P loses the support of the big heavyweights, well then that becomes somewhat problematic. Right. It seems to foster that kind of corrective action.
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Host 1
I don't know if you've heard, but AI and technology are changing the whole world. Maybe this news is broken to you too.
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Katie Stockton
Yeah, I've gotten wind of it.
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Host 1
We must be looking at the same Twitter. So inside of that, this rally stalling and seeing some of these demarc indicators, like what does it mean when we start to see this for the sustainability of the tech and the AI rally? Because it is concentrated in some of these same names.
- [19:11]
Katie Stockton
Yeah. And I mean, wow, there's some really, really steep up moves out there within the AI theme that has been so strong. But by no means would I see a correction as something that would mark the end of that theme. Um, you know, it maybe could be the start of a more discriminatory environment as it pertains to the fundamentals of these companies where just. And I don't think it's a bubble, but there was, you know, sort of a shaking out of weaker companies in the dot com bubble when we had that very powerful theme. But there ultimately were still some really big winners from it. Right. So maybe it's just a narrowing of the theme that, that a correction could end and still. But our assumption should always be that a correction or consolidation phase in a long term uptrend should refresh it unless it proves us otherwise. You know, if we see breakdowns or what have you, of course we'll respond to that accordingly. But Our assumption is that we will see a correction, ultimately meet buyers and that certainly translates to leadership segments like AI. So I wouldn't assume it's the end of it. I would assume that perhaps it will instill a little bit more scrutiny on the fundamentals of the individual companies as it, as it often does. It's just an impact on market sentiment and maybe that's not a terrible thing.
- [20:34]
Host 1
One of my favorite parts about the work you do is you know how to take this and now start to apply it at the sector level. So let's talk for a minute about the shifts sort of in these, in these sector readings, how you're interpreting them and maybe just explain how technical analysis can help with sector by sector analysis.
- [20:54]
Katie Stockton
Yeah, I mean you heard the name of our etf, the Fairlead Tactical Sector etf, right. So we're really big into sector relative performance and momentum and you can apply it in many different ways, but we see it as something that is sort of an easy way to take advantage of certain market environments when any given year you see like a huge dispersion between the winning sectors and the losing sectors. So right there we have a bit of a gift from the market to suggest that if you can choose the best sectors, you'll have more odds in your favor. You can also use the sectors to diversify and limit your tech exposure, which is what TAC partly does. So there's, there's ways to reduce concentration through sector positioning. There's ways to leverage relative performance and, and even to leverage different sort of external macro technicals, I call them like an energy. When crude oil is working well then we have a sector to take advantage of that. So there, there's a great opportunity there I think to use it as an investable input. And for us we apply not only the same tools that we talked about before, but we'll even look at the ratios usually for like a sector index or the sector spiders we use in our own ETF. We'll look at them relative to the S&P 500 and watch the trends there. We'll watch them over long term and intermediate term timeframes. In our etf we're very long term in focus. We're just trying to keep the long term trends on our side. So as an example, you know, we have not been in the energy sector lately, but we were certainly there in 2022 and that's simply a reflection of trend. In the fairly tactics report that we put out on a weekly basis, we highlight all the S&P 500 sectors in relative terms. And there we take a shorter term stance looking for sometimes counter trend opportunities. As an example, we just upgraded healthcare and so healthcare is in a downtrend, a long term downtrend. But there's been enough improvement in the ratio against the S&P 500 to suggest that we have an opportunity for countertrend relative outperformance in the near term. And you're seeing that from a bottom up perspective. If you pull up something like Pfizer, which has not been a great stock, it has a short term breakout and maybe it will remain not a great stock on the back of this relief rally, but for now we have a relief rally to take advantage of. So that that's what we're doing and we're trying to sort of nuance the shorter term relative moves within the context of the broader long term trends and help people see where there's opportunity. When it sometimes feels like it's all tech all the time, especially in this.
- [23:41]
Host 1
Environment, it definitely sometimes feels like it's all tech all the time. I want to go through a couple of the sectors you already hinted at, healthcare. You can also maybe tell me how you ever show restraint with wanting to say is healthcare getting more healthy or not quite dead yet.
- [23:59]
Katie Stockton
I like that. What's so interesting about healthcare, I would say is that it is diverse, right? There's so many different subsegments within healthcare and so I think that's opportunity, you know, managed care versus biotech versus med device names. So there's a lot to do. It's a very rich sector in terms of that diversity. So we, we can always find something that's working within healthcare. So in a way it's kind of a bummer for some of these individual stocks that are almost dragged down by their broader sector that have been doing really very well. But we think there's a counter trend opportunity there. We think also that energy will emerge with some counter trend opportunities, if not already. There's definitely some setups there that are pretty interesting. Maybe it'll be a better 2026 for energy than it has been at 2025 are sort of the implications there. So we're always looking for those sort of investable opportunities, maybe something that has implications for like two to three months to take advantage of. And right now, you know, the defensive sectors still point lower in the short term, but largely have seen what I would call a loss of long term downside momentum. So this would be utilities, you know, having their ratio. It's still, you know, not necessarily a Super strong uptrend in the ratio, but certainly has turned the corner, you know, within its longer term downtrend. So we're always looking for that kind of opportunity. But then also we're always interested in honestly staying with what's working. And what has been working has really been communication services and technology, both helped by the mega cap exposure of those sectors. Those have been primary sources of outperformance in 2025. So we're still on board with that. But the utilities are interesting as one standout, kind of a third runner up if you will, from these other ones. And you know, we want to be there for that diversity too.
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Host 1
So I want to call out a couple others just because I think the charts are so interesting. So number one, actually just the utilities index and we'll get this up on the screen. The price actually breaking higher while the relative measure is relatively flat. How do you parse that? Can you just go into a little bit more detail on utilities?
- [26:26]
Katie Stockton
Well, yeah, and I mean it's almost been detrimental that, that we've had sort of the market cap is not really that big in utilities as you know, it's not a huge footprint within the S&P 500. But finally we are seeing the relative performance, you know, kick in especially on the individual stock level. Today we featured, we do CNBC Pro articles once a week on Mondays and we featured Nextera Energy, which is ticker N E E. It's the biggest holding of the XLU ETF and you'll see a proper breakout there in both absolute and relative terms. So when you have a sector heavyweight like that really kick in to exhibit upside leadership within the sector, that's when you can see a meaningful shift.
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Host 1
What about, I want to look at consumer staples too because the other thing besides tech dominating everything is consumers aren't feeling so good. Inflation's a problem. Somebody told me that online somewhere the other day. What's going on with the Consumer Staples index?
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Katie Stockton
Yeah, consumer staples. I mean if you look at the ratio, it's been trending lower and I could add to that the sort of real estate sector hasn't been able to kick in in the way that we would hope. But it's just a matter of watching out for counter trend signals. Within Staples we don't have a very strong buy signal right now. You have some minor signs of downside exhaustion and debris mark indicators, but we certainly don't have a relative turnaround to highlight. There's, you know, within the, the sector I would say a lot of those stocks are still Range bound because of that relative performance. So where, you know, we, we're picturing the S&P 500 typically when we think about the stock market a lot of those names don't look like that. And yet that may not be a bad thing for them. If we see a correction as you could imagine, where that defensive sectors tend to kick in as relative outperformers and even can move higher in a weak tape. And I would say that about energy as well. Something that can do better just like in 2022 when the tape weakens. So we'd like to have this optionality to shift into the defensive sectors when the market warrants it, especially for those that have to have equity exposure at all times. They are always looking for sources of relative performance, particularly when volatility picks up to the downside. So Staples will have their moment. It doesn't feel like it's imminent, but that can change really quickly. As soon as we see those 20 days perhaps roll over, well then they might be treated as the safe haven that they have historically been.
- [29:10]
Host 1
And what about another one that just what's going on in this chart I feel like is telling a giant story financials because we're still seeing the upward bias but we're starting to lag against the index. What's going on with finance?
- [29:22]
Katie Stockton
Yeah, that was interesting. You do have a loss of relative performance that surprised us. We previously were underweight, then we moved to equal weight and then we just moved back to underweight. Because when we see a breakdown we have to honor it. And we do have a breakdown in the ratio of the financial sector index to the S&P 500. In absolute terms they haven't done badly. You know you can find a lot of really good looking long term charts there. And even XLF has had positive long term momentum characteristics that have not changed with that loss of relative performance of late. But in terms of looking at them versus the S and P, they've lost that sort of uptick that they had in relative performance. And who knows exactly what that's related to. The charts aren't going to answer why that's happening. But you could imagine maybe it's some speculation around the direction of yields and you know, sometimes when that happens also it's, it's a function of a few of the big heavyweights in the sector. So you know I looked at Citigroup for someone today as one what a great long term chart. You know you had a big range breakout, you had some good follow through positive long term momentum. But there's a pullback underway. Right. So a short term loss of momentum that certainly is, you know, something to honor, especially if you're looking to add exposure. You have the loss of relative performance and now as of the past two to three weeks, a loss of short term upside moment momentum to suggest that it's good time to maybe wait to add exposure to take advantage of those long term trends.
- [31:09]
Host 1
Looking at tac, the ETF T A, C, K looking at tack relative to just the market cap weighted S&P 500 or correct me on the benchmark, if you need to correct me on this. How are we thinking in terms of just composure? Why is it, how different does it look right now?
- [31:27]
Katie Stockton
You know, we have about 87% equity exposure. So TAC is probably as much as it's a tactical sector fund driven by technical analysis. It also employs asset allocation and it does that to manage risk during downdrafts. So right now we're not really employing asset allocation to manage risk to any strong degree. We went as high as 25% non equity exposure this year, but we're sitting right around sort of like a very full equity exposure at this time. The risk off piece is dedicated to short term Treasuries, long term Treasuries and gold. And gold of course has been additive in and of itself. But the sectors, it's almost a barbell. You know, we have utilities but we also have technology. So we have the sectors that are exhibiting positive long term momentum. Now our proxy or benchmark is not the S&P 500 index. Of course we want to beat the S&P 500, but our benchmark is actually the Russell 1000 equal weight index. And we have been outperforming that benchmark, meaning that the equal weight sector approach has been additive versus an equal weight individual stock approach. That's often the case, especially with the technicals sort of as a good tailwind. And then our category for Morningstar is actually the US Tactical allocation category. So it's acknowledging the fact that TAC at times can be 0% equities. So we have seen TAC shift over history in bear cycles, the model before we launched, and then in 2022 to a nearly zero percent equity exposure. So it's a very dynamic fund that can almost serve as a standalone portfolio. I design it in a way to be something I could put my IRA in and not worry about. And then with the rest of that ira, perhaps use that to trade more opportunistic setups. Technology stocks especially. We found that most investors are Very heavy technology. It's the sector that we get the most questions about. It's the sector that I think instills the most excitement because of its growth. So we wanted to have something that serves as a low beta, foundational sector focused product that gives us exposure to the other sectors that are working. But by doing so it naturally defaults to an underweight technology sector position of 12 and a half percent at our model exposure. So that's something that I would encourage people to sort of keep in mind. Right. So if you have a TAC position, tech is exhibiting leadership. Well then you also want to have TAC to supplement that at or tech to supplement the tack positioning.
- [34:15]
Host 1
Well done on dancing around tick tack and tech and all the other pieces of this.
- [34:20]
Katie Stockton
Exactly.
- [34:21]
Host 1
That's a mouthful right there. Specific to the broadening out idea and even looking at the equal weight versus the cap weighted, I know coming into the end of last quarter, I want to say the top 10 in the S&P 500 was like 38% of the S and P and the Nasdaq, I think it was just over 50% for the top 10 holdings. This broadening out theme, are we just going to wait forever for this? Is it starting? Is it a long time away? I know you don't have a crystal ball, but how do you think through this on a technical.
- [34:51]
Katie Stockton
It's funny because the rally or the uptrend has actually been pretty broad. What people are talking about, what maybe they don't realize they're talking about is the leadership has been narrow. Right. So where the outperformance is coming from has been more concentrated. But there's been like, you know, the pretty good participation on the upside. Like on an update. Most stocks are up, but the stocks that are up the most, while those have been largely the, the mega caps and sort of those large cap tech names. When will that shift? We have no idea. We want to respect that Tech has been a pretty consistent source of long term upside leadership in both cycles. Right. So when we see a correction, we certainly want to be there, ready to add to tech and to recommend to do so. So we'll just respond to that when it happens. But what we like, you know, through sector investing or whatever it may be that, you know, we want to have heavier positions in those mega caps and we arrive at that through the sector spider etf. So we know that when we're investing say in, you know, xlk, well we're getting a heavy position in Apple and Microsoft and we're comfortable with that because we're not doing fundamental research, but we know that the markets rewarded those companies with their market cap. So there's a reason they're big companies, right. There's a reason that they're showing up as the heavyweight positions in these sector ETFs. So we're grateful to have that. You know, the market is guiding us in a way to suggest that these are the winners. Right. So we're, we're actually kind of okay with that, that concentrated leadership. As long as you have a way to, to be aware of it. Right. As long as you can track it. And also in, in doing so, realize that the risk that you're also carrying because when they go down, they're going to probably all go down together and probably somewhat, you know, dramatically so. So when you have that concentration risk in your portfolio, you just need to have a way to manage through it.
- [36:59]
Host 2
Wanted to ask you about a few other markets and asset classes and let's start with gold. Gold has been on a tear. What is this gold chart telling us?
- [37:10]
Katie Stockton
So what I will say about gold is that we've just been respecting the uptrend. So the uptrend has had momentum across timeframes for a really long time and we've been sort of on board with that. Our moving averages, for example, allpoint higher. There was a consolidation phase that lasted a few months, but no breakdown from that. Short term support even held. And then when we were able to see gold push out of it a few weeks ago, that acted as a positive technical catalyst. And we've seen precious metals broadly undergo these positive technical catalysts like macd buy signals on the weekly charts, things of that nature. So long term uptrend, it's been pretty orderly. As much as it might look a bit too steep here. Short term that doesn't mean you sell it. It means that you acknowledge the potential for consolidation and just determine what your threshold is for weathering through that. You know it's going to be different for everyone. The objective that we could get from the last breakout was already exceeded. So unfortunately we don't have a great way to, you know, understand what the upside potential is from here. It is what it is. The chart either lends itself to that or not. But at least we have ways to know if there is a loss of momentum and certainly right now we just don't have it.
- [38:33]
Host 2
I think that's one of the challenging things though. When you have like a great either at a stock level or whatever asset class, you know, you have this great run and then trying to figure out like when do you, maybe you don't completely sell out, but you know, when do you take profits? Sometimes, you know, you're leaving money on the table but it's kind of like a risk reducing thing because maybe the position has gotten too big in your portfolio, let's say, or something like that. So how do you, how could technicals like inform someone in that situation?
- [39:03]
Katie Stockton
I mean I have a lot of clients that just use technicals for a self discipline because that's the hard part, isn't it? To know when to reduce exposure, especially if something's been working. So I think it's a great discipline to get you there. And it's a matter of having, you know, a methodology and kind of sticking to it as well. So someone could simply use the demarc indicators and say, you know, as soon as we see signs of exhaustion, I'll reduce. Right. But I think what really needs to be kept in mind for those that are using it that way is timeframe. If you have a short term sell signal. Well, if you're a long term investor, like just ignore it. And we have long term investors like a long only portfolio manager who we review charts for as one example. And I only look at the monthly chart so it actually it's hard for me because I'm constantly looking at those multiple time frames. But I literally move off of my screen those shorter term charts and just look at the monthly because his timeframe is like three plus years as you know. And that's where the daily chart just won't matter. So if they have these long term positions, they're also going to incur taxable events if they reduce exposure. So they don't want to do that too high with, with any frequency. And so we really just make sure that there's no big sell signals on the monthly chart. So you can use the macds, you can use the demarc indicators, you can use the stochastics or some other methodology. But I would just try to stick to the same methodology as you do it. And as you evaluate each of these individual charts and just make sure that you're focusing on the time frame over which you tend to invest. Right. If you're higher frequency, well then dailies or even intradays. If you're more like quarterly or a swing trader, well then the weeklies are probably most important to you in terms of the bar chart to use for that input.
- [40:59]
Host 2
It's a great point on the time frame thing. What about oil? I feel like oil's been in this range for a while, what would it take out? What would it take for oil to break out?
- [41:09]
Katie Stockton
Technically, 70 is a level for us and not to oversimplify, but it is just a level that we see on the daily and weekly cloud model that we use as a gauge of resistance. So we're watching the cloud. You know, there are indications that we had a major low established by crude oil in the springtime. And that's from the monthly stochastic oscillator that we're getting that takeaway. So we have early indications of a potential turnaround, but we won't believe it until it happens. Right. We don't want to get too heavy in our positioning unless we actually see that bullish reversal for crude or for people who want to see crude go, go higher. So above 70 it starts to look like it's really advanced from at least the cyclical downtrend that it's been in for some time. And you can start talking about more substantial upside from there. And also just not just in price terms, but just in timeframe. So that's what we're watching. And meanwhile just trying to, you know, watch it short term for any catalysts or anything like that that impacts of course the energy stocks that we're looking at as well.
- [42:16]
Host 1
Is there anything with both, with gold, like looking at the related, looking at silver, with oil, looking at natural gas. Are you looking at any of those in a composite way or are you just looking at them each individually?
- [42:30]
Katie Stockton
We, we tend to look at everything individually. I mean not, not totally unaware of the relationships. Right, but we want to treat them as individual charts and inputs and ideally it makes sense how they're acting. Right. So ideally silver is correlated with gold and that of course makes sense. And ideally you're seeing a breakout around the same time. But when you have divergences, that can be pretty informational too. Crude oil and natural gas do have their own characteristics, just like gold versus Bitcoin or so you have these relationships that can be really interesting. We look at consumer staples versus consumer discretionary is another comparison that's kind of popular. So yeah, we look at that. But we do try to treat them individually and then make sense of any divergences.
- [43:26]
Host 2
Looks like the 10 year treasuries bounced off its long term support of 4% here in this chart. What do you, what is the takeaway here from this? Would you say neutral?
- [43:43]
Katie Stockton
You know, it's been a neutral range that's taken the shape of a triangle formation. So the tenure yields kind of a flat resistance level once you're getting up into the 4¾ area, but they have rising lows, so higher lows, that puts that trend line right near just above 4% at this time. So we've been watching that really closely. It, it is natural for a trend line to act as support and it did do that. So if we see a couple weekly closes below that trendline support, that would be a big deal because it would tell us that the down move that we've seen within the range is the start of a more substantial cyclical down move for yields. We are, if we zoom farther out, looking at this move within the context of what we think is a secular uptrend that was established years ago and the reversal of a long term series of lower highs. However, within that context you can still see, you can see 10 year yields go to 3, 2, 3, 4, 25 before resuming that secular uptrend. So we know that that's obviously going to be something that would be interesting to folks. So if we break that 4% level for the 10 year, then some metrics point to that area as, as a longer term objective on the downs.
- [45:06]
Host 2
I feel like maybe six months ago or a year ago, like the 10 year was all a lot of focus on it and I feel like lately it hasn't been. Is that like a correct observation? And then also I'm just curious from your like experience in the markets, like I tend to think like, you know, the market gets worked up about something and then it sort of gets like callous to it, it gets like over it. Obviously this is a big, big deal because it's like, you know, the borrowing costs of like for mortgages and everything it affects. I understand that, but I'm just. The market kind of tends to move on from things and so I'm just wondering your just your opinion, your, your take on that.
- [45:45]
Katie Stockton
It's funny, I'm sort of aware of that too. I call it the macro indicator du jour. Right. It's, you know, people are always focused on something, but it does sometimes change. And you know, I don't know if I agree or disagree about the focus on yields as being acute or not, but usually when there's volatility, that's when people are talking about it. And maybe because it's been more a consolidation phase of late and there was a sort of muted reaction to the last Fed rate cut, well that, that could be part and parcel with the lack of attention or headlines around it. But you could imagine if we take out four, that Might change pretty quickly. So I would relate it to the volatility.
- [46:29]
Host 2
Yeah. Okay, and this last one here is the dollar index. You know, the dollar's kind of come down over time here. What's the chart telling us?
- [46:41]
Katie Stockton
Well, the dollar index actually has a secular uptrend in place too. But it's certainly seen a pretty distinct cyclical downtrend within that context that that uptrend line puts support not terribly far below current levels. It's close to 97. So we have seen that support level hold similar to what we've seen from treasury yields. If we were to see the dollar continue to stabilize and clear some resistance, which I think is around 98.10 at this point, that would be meaningful in terms of the cyclical downtrend potentially reversing for the dollar, meaning that that longer term support level held. But we have right now just a neutral range backing and filling between that resistance and the long term support line. And the long term indicators would suggest that the dollar index is at risk of breaking down. So the, you know, monthly MACD is just one input is pointing lower for the dollar index. So we're usually under this assumption that the prevailing cyclical trend will persist. And so if we see that that support breached meaningfully, usually for us that means a couple weekly closes below, well then that would be reason to suggest that maybe even that secular uptrend has reversed. So definitely in a key sort of, I call it like a sandwich between support and resistance for the dollar. Within that context, I would call it neutral.
- [48:11]
Host 2
Are there any charts that you're paying particular attention to? Is there anything that's standing out to you as something that's just top of your radar right now that you're paying, you know, most attention to with the, I guess the trend in the market?
- [48:26]
Katie Stockton
Yeah, I would watch closely, or I am watching closely the relationship between fixed income and equity. So not just the level of yields, which of course is a primary input right now, but also looking at something like TLT, which is a Treasury Bond ETF relative to the S&P 500. Of course there's a downtrend there. So if we were to see a reaction to an oversold signal that we have, that would be pretty interesting and meaningful. So we're watching that very closely. We're watching the VIX also very closely. It's been acting a little funny as everyone seems to be tuned into. So we're using that as another great kind of risk metric, if you will. So those are definitely primary inputs. And then the mega caps because they are exhibiting leadership and it has been so concentrated and they really are driving the narrative behind the market right now. We always are looking at those as a primary input. So what we've noticed from them is that they don't all move up in tandem all the time. Now, there's been a little bit of a divergence in that, that maybe people are treating them more as individual companies versus part of the mega cap complex. So those are the types of things that we always have on our radar. And honestly, we get questions about it all the time, too. You know, people are still asking about Nvidia nearly every day.
- [49:53]
Host 1
Can you say just a little bit more about tracking the changes in correlations? Like looking at that TLT versus stocks, looking at those correlation trend changes. How do you, what would it tell you if that's starting to change today?
- [50:08]
Katie Stockton
I mean, I would think it's in a way like a risk metric. Right. So it would be probably associated with consumer staples garnering some relative strength. Right. So anything that's done poorly in the environment since the April low at least has underperformed because it's either a safe haven. Right. Or there's, you know, something more attractive out there. And if we see that relative shift, which sometimes will happen before we actually can garner it from the absolute charts, if you see that relative shift, well, it means that people are getting more interested in those asset classes or segments of the market that are a little bit lower risk or perceived as such. So we look at it for that reason to help us, I guess, be informed as to whether risk is heightened for the S&P 500. But we also look at it for opportunity. And so opportunity to maybe it's adding to fixed income and getting a little bit deeper into our metrics there. So looking for ways to generate alpha and to leverage not only the relative trends, but also the absolute trends.
- [51:20]
Host 2
Okay, Katie, thank you very much. We know, you know, some of this is coming out of your premium research, some of it's coming out stuff you're putting out to the public. But, you know, having you on for close to an hour, working through some of this stuff, I know is extremely valuable for our audience. So we greatly appreciate it and hope to have you back on soon. Thanks, Katie.
- [51:38]
Katie Stockton
Of course. Thank you.
- [51:40]
Host 2
Thank you for tuning in to this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the XS returns network@excessreturnspod.com if you have any feedback or questions, you can contact us@excessreturnspodmail.com no information on this podcast.
- [52:00]
Host 1
Should be construed as investment advice.
- [52:02]
Host 2
Securities discussed in the podcast may be.
- [52:05]
Host 1
Holdings of the firms of the hosts or their clients.