← Excess Returns 
Excess Returns
The Signal Before the Spike | Katie Stockton on What the Charts Tell Us About What Comes Next
00:48:34
Loading summary
Transcript97 lines
- [00:06]
Chef Meilin
As a chef, I know flavor doesn't begin in the kitchen, it begins on the land. And West Home's Nature Led Australian Wagyu is a story written in the landscape of Northern Australia. Cooking is storytelling and West Home Wagyu carries a story of Northern Australia itself. Raw, powerful and deeply authentic. It's a testament to the passion and care raised in the rhythm of Northern Australia. I'm chef Meilin from 88 Club in Los Angeles and I invite you to visit WestHome.comMaitland to learn more and taste a story only Westholm Nature Led Australian Wagyu can tell. That's W e s T H o l m e.comm e I L I
- [00:49]
Onnit Alpha Brain Advertiser
n Ever feel like your brain just won't click? Onnit Alpha Brain is a daily supplement engineered to support memory, focus and mental speech. Made with science backed ingredients, Onnit Alpha Brain helps you lock in, tune out distractions and stay sharp. See what your brain can really do. Visit onnit.com and shop Alpha Brain to unlock your next level. That's o n n I-t.com we have
- [01:16]
Katie Stockton
a new as of the end of March macd sell signal on the monthly chart. And these, they're not often whipsaws. It's more the slow grind lower. That actually is something that ends up being more problematic I would say for the market. And that's a bit more aligned with what we've seen lately from the S&P 500. The shift in crude oil actually began before the Middle east conflict began, so it was pretty interesting to see the monthly macd. The same thing we were addressing for The S&P 500 for WTI, crude oil actually flipped to a so called buy signal and that was in February.
- [02:02]
Justin
Hi Katie, welcome back to Excess Returns.
- [02:04]
Katie Stockton
Hey Justin, good to be back.
- [02:06]
Justin
We always like to have you on once every few months just to get an understanding of what is going on beneath the surface of the market from a technical lens, which is where your expertise lies. And there's a lot to talk about today. There's a lot going on in the market. Volatility has picked up and so I think what the some of the things that we want to work through with you are talking about, you know, broad market trends. There's been, you know, some loss of momentum in the S&P 500 that we're going to talk about. We'll talk about the trend in things like oil and gold mega caps and just some of the more interesting things you're seeing under the surface from a tech sector perspective and that kind of translates into how you manage the ETF that you guys run. So looking forward to this discussion today as I, I know our audiences as well. For those that are interested in learning more, you can learn more about Katie and the suite of research products that her firm offers as well as the ETF they advise on@fairleadstrategies.com and thank you Katie by the way, for sharing some of these, you know, charts with us that come from your premium research suite. We, we, we, we really appreciate the, the sharing of this information and this content, of course.
- [03:22]
Katie Stockton
Happy to.
- [03:24]
Justin
So let's start with, I think the thing that most investors or a lot of investors pay attention to and that's the S&P 500. Walk us through this first chart. What you're seeing in the S and P from a trend and momentum standpoint.
- [03:43]
Katie Stockton
Well, you can imagine it's, it's not as good as it was last year. Right. The message is a little bit more bearish or maybe neutral at best. I think for what we're seeing in the monthly SPX chart. We did actually see a whipsaw in the monthly MACD last year which is a long term momentum gauge but they're pretty uncommon. So when they unfold, which is, is few and far between, we do pay attention to them and give them some weight in our research. And this new sell signal just affirms what we already know which is, you know, very weak intermediate term momentum is now impacting these long term indicators and, and it follows what was a counter trend signal from the demarc indicators. We denote that by the 13s on the chart. And these signals have been pretty timely in the past as an in like indications of corrections or bear cycles or even just kind of choppy ranges. So when we see them we also pay attention because they infrequent and you know, we find them pretty timely as counter trend indicators. So now we have a confirmed 13, so to speak and a monthly MACD cell to affirm the loss of momentum that we're seeing and to suggest that it could be a bit more of a prolonged choppy phase for the S and P. Can you just talk through
- [05:06]
Justin
a little bit more what that 13 actually indicates? The long term counter trend signal. Like what if you were to describe that, how would you do it?
- [05:17]
Katie Stockton
Yeah, so the macd, it, it stands for moving average convergence divergence and it's effectively the spread between two exponential moving averages of price. And then it has this signal line which is great because that allows for more of Like a binary takeaway, positive or negative, weakening or strengthening, that type of thing. And when we see the crossovers, that's where we have these so called signals. So we love the macd. It is a lagging indicator, so it will tell us often what we already sense is happening. But it affirms that it's a significant shift when you see these crossovers as opposed to just sort of a corrective move. And that's where we stand presently. Is that the monthly MacDonald, you know, suggesting that it's a more of a cyclical shift as opposed to just a correction like we saw around this time last year. In fact, there's a lot of differences between the current setup and last year around this time when of course we saw the S&P 500 bottom in April of 25. That correction was much swifter, a little bit more painful in a way from a shorter term perspective. But the characteristics were different in that one. When you see a swift decline like that, where you have bigger declines day after day, that's actually more likely a counter trend move. It's kind of counterintuitive in that sense, but it's more the slow grind, lower. That actually is something that ends up being more problematic, I would say for the market. And that's a bit more aligned with what we've seen lately from the S&P 500. So that's one main difference. But then also the breath contraction that we've seen in this corrective phase has been significant, certainly, but not nearly as significant as it was in that quicker corrective phase that acted ultimately as a bit of a washout. One example of that would be the percentage of stocks above their 200 day moving averages, which is currently around 44, 45%. And at the April 25th low was below 20%.
- [07:31]
Justin
So it looks like in the chart you have this support level right above 6,000 in the S and P. So if we were to hit that and bounce, would you consider that to be a positive and then what would happen if we broke through that?
- [07:46]
Katie Stockton
Yeah, so usually when we see a breakdown below support that's a negative development. It just takes out that kind of perspective buying pressure and tells us those buyers just aren't there. The level that we're watching is between about 6130 and about 6175. And it's based on three inputs on the charts, one of which is a Fibonacci retracement level. And it is a key area. It has, you know, definitely some importance to it because below that Then you start to look at, you know, 5,900 as the next level. You start to get into the 5000s, which I don't think any of us want to see. Um, so not an insignificant support level. We use these levels as gauges of potential, right. Downside, potential to support, upside, potential to resistance, as opposed to saying, okay, well we want to add exposure at that level. Right. We don't say we're going to add exposure at say 6150 because we just don't know honestly how the indicators will, will look at that time if we get there. So rather than looking for a key level to add, we look for more of like a key setup to add in terms of our indicators. And one of those keys that I find really helpful and important would be the oversold condition, obviously, but then the reaction to that. So like an uptick in momentum. Right, which is what you're saying, Justin. You want to see the bounce off of the level and the bounce is what ultimately should allow the indicators to start to improve. So it's kind of that like support discovery that we're looking for, not just the support level itself.
- [09:27]
Justin
You know, I think the one thing with technicals is that it's always discipline. And I'm going to use the word systematic, but I bet maybe I should be using the word technical. But you know, there's not, It's a consistent methodology that is used to look at, you know, prices and trends. But I guess the question that I have for you kind of philosophically here maybe is, you know, does, do you think about it at all any differently when, and maybe it's always a headline driven market when you have these like exogenous events, if I'm using. But you know, clearly the market's reacting to the, the, the, the war with Iran, obviously the price of oil, which we'll talk about in a second. But does that, does that, does that change anything at all versus how you would look at technicals in maybe a normal business environment or expansion or recession? Or is it no that. It's just we always want to look at technicals in the same way, regardless of the event. That makes sense.
- [10:26]
Katie Stockton
I mean, the short answer would be no, but it's never that simple, is it? I mean, when we have any kind of headline risk and we think of it more often on the individual stock level, right. When there's headline risk, that does make things harder, right? It makes maybe levels less important to some degree and allows for more frequent breakouts, breakdowns, extra volatility. So it is a factor, right. Sort of that top down headline risk is what I would call it. But we have ways to navigate that and the indicators are designed to reduce noise. So that's the good news is that we have these tools that are going to help us understand which reaction is just noise, like perhaps we've seen just over the past couple of days from the equity market, and which reaction is actually meaningful in terms of generating a breakout or breakdown. So the indicators are designed to help us through these types of environments that are characterized by a lot of headline driven volatility. But it does make things harder, I would say. And for sure, you know, we always keep that in mind when we're thinking about key levels and things like that. K Pop Demon Hunters, Paja Boy's Breakfast
- [11:46]
McDonald's Advertiser
Meal and Hunt Trick's Meal have just dropped at McDonald's.
- [11:49]
Katie Stockton
They're calling this a battle for the fans.
- [11:51]
McDonald's Advertiser
What do you say to that, Rumi?
- [11:53]
Katie Stockton
It's not a battle.
- [11:54]
McDonald's Advertiser
So glad the Saja Boys could take breakfast and give our meal the rest of the day.
- [11:58]
Justin
It is an honor to share.
- [12:00]
Katie Stockton
No, it's our honor. It is our larger honor.
- [12:04]
Chef Meilin
No, really stop.
- [12:06]
Katie Stockton
You can really feel the respect in this battle. Pick a meal to pick a side
- [12:12]
Indeed Advertiser
and participate in McDonald's while supplies last.
- [12:15]
McDonald's Advertiser
This episode is brought to you by Indeed. Stop waiting around for the perfect candidate. Instead, use Indeed sponsored jobs to find the right people with the right skills fast. It's a simple way to make sure your listing is the first candidate. C According to Indeed data, Sponsored Jobs have four times more applicants than non sponsored jobs. So go build your dream team today with Indeed. Get a $75 sponsored job credit@ Indeed.com podcast. Terms and conditions apply.
- [12:43]
Justin
One of the things that's influencing the market a lot right now is, is is not the war itself. It's almost like the price of oil because of the war and the impact that that's going to have on the economy and the markets. So can you just. We have this WTI Crude Oils future chart in here. Can you talk to what this is showing which is a big spike?
- [13:06]
Katie Stockton
Yeah, I mean it's really been fascinating to watch and obviously has not been well received by the equity market. But the shift in crude oil actually began before the Middle east conflict began. So it was pretty interesting to see the monthly macd. The same thing we were addressing for the S&P 500 for WTI. Crude oil actually flipped to a so called buy signal. And that was in February, which is pretty remarkable to have seen that. And that was before the Breakout above what we considered to be kind of like the key threshold above which the longer term cyclical downtrend in crude oil would be reversed. And that was. It feels like ancient history, but around $68 per barrel. Obviously saw the breakout generated and immediate follow through. Last I looked where we're seeing WTI trading around $109 per barrel. Really explosive up move and obviously very much related to the geopolitical situation. But because we had that MACD shift before the conflict and had already seen some early indications of a long term low and that was based in part on the just overbought oversold metrics that we use, things like the stochastic oscillator and the demarc indicators. Not to get too technical, but there were some signs of downside exhaustion that we felt were meaningful in the price of crude oil. And we also feel like it's kind of a, I don't know if I'd say secular, but at least a cyclical shift. Meaning that this spike, as much as it's a spike and probably won't be sustained in the same fashion, it is probably the beginning of a series of higher highs and higher lows for crude oil prices. So I wouldn't just expect this to go back to, you know, 50s or 60s and just sit there, but rather I think it's the beginning of a
- [15:06]
Jack
different cycle and technical analysis are big moves considered less sustainable. I was just thinking to the world of factor investing that we operate in the momentum factor. When the momentum is more consistent, it's considered more sustainable versus when the momentum's a new drug is announced and the stock spikes right away. Does it matter to you how fast the move is in terms of if it's sustainable?
- [15:26]
Katie Stockton
Yeah, totally. And in a way, if you take the comments that I made about the correction in the S and P last year and reverse that. Right. For crude oil you could argue that the speed with which we've seen this rally develop would be more likely counter trend in this case. I think it's a little bit different just because we have. Or maybe a lot different because we have the breakout, we have the MACD shift. We have other things to suggest that it is kind of a major turning point that we've already seen from crude. But in general, yeah, for sure the, the sharpness of a move can help us understand if it's counter trend or not or the start of something more meaningful on the individual stock level. By all means, if you see, you know, a news driven relief rally or something like that, that's quite strong. You know, maybe you should be a little bit less trusting of it. Just if it is explosive in a way and always just let the indicators guide you as to whether it's significant.
- [16:30]
Jack
Can you explain the shaded areas in the chart? I believe you call this your cloud indicator if I'm correct. But can you explain what that means?
- [16:36]
Katie Stockton
Yeah, so it's actually got a more technical name than that. It's Ichimoku. It was developed in Japan centuries ago. Even so it's been around a long time and, and I call it the cloud model. It's a bit more common known as that here in the US but it's. The shaded area is a derivation of this model which is I'd say derived from midpoints of price. So usually you take a moving average and it becomes sort of the rolling look back at prices on like a closing basis or something like this. Whereas a midpoint is going to take a high, low spread and take the actual midpoint. So you'll notice that the cloud, the shaded area has this kind of plateaus at times and that's because we're using midpoints for its calculation. See it as in part a guideline, I'd say as to the prevailing trend. If you see the price bar above it, that's an uptrend. If it's below it, that's a downtrend. And then also it helps act as a useful gauge of support and resistance at times. So you know, by the nature of say something being stretched well above or below that doesn't act as like a magnet per se but it does remind you of that prevailing trend and it has an interesting forward looking shift to it, this model, which is about 26 periods I believe and it's not misaligned with parameters and other common technical indicators and it helps us give that kind of visual. It's basically projecting the current trend ahead of it to give you a sense of whether it may persist or not. So it tries to give you a bit of a forecast based on the current trend.
- [18:16]
Jack
I'm just curious, it doesn't relate specifically to this chart but in the media all the time you'll hear things like oil is overbought or the S and P is oversold. Like what does that mean? I realize like, I probably, like most people probably don't know exactly what that means. I probably don't know that much about what that means. Like what do you mean when you say something overbought or oversold?
- [18:31]
Katie Stockton
It's a, it's a really good question because I think it's, it's an overused phrase or term in that, you know, the overbought and oversold conditions are actually measurable. So it's coming from a technical indicator. At least for us it is. You know, when you read about it in the media, perhaps it's, it's more just people saying, oh, well, it seems overbought or seems oversold if it's gone up strongly or down strongly. But in reality it's, it's based on the indicators. There's multiple indicators that you can use to measure it. We like the stochastic oscillator, which is between 0 and 100%. A sub 20% reading is oversold and above 80% is overbought. But there are nuances in how we look at it. So we don't see an oversold reading as a positive until it gives way to an uptick in momentum and vice versa. So, you know, the. I wouldn't assume overbought as a negative because I, I mean, I don't think I've ever seen anything break out and not be overbought at the same time. Right. So it's often a reflection of very strong upside momentum. It's when you lose that momentum that that becomes problematic.
- [19:43]
Jack
And it also could vary by time frame. Right. Something could be like short term overbought or oversold and long term overbought or oversold.
- [19:49]
Onnit Alpha Brain Advertiser
Right.
- [19:49]
Jack
It can vary depending on how you're looking.
- [19:51]
Katie Stockton
Yeah, for sure. So always like reconciling the different time horizons based on what you care most about. Right. So a short term oversold indication might have implications for days, days to maybe three weeks or so. That, that's from a daily chart. On a weekly chart, it might have implications for weeks to up to maybe three months or so. So you really have to keep that in mind. You know, sometimes it can be confusing. Right. If we highlight an oversold buy signal per se in our work on a daily chart and you know, that might not have the shelf life that everybody wants. Right. So it definitely is, it's really important to make sure to indicate the time horizon.
- [20:37]
Jack
How do you think about the correlation between different assets or do you think
- [20:39]
Justin
about it at all?
- [20:40]
Jack
Like I was thinking, we did an options podcast recently and we, we had a chart that basically showed the VIX in oil since this spike have been basically completely correlated, but for the rest of the time they're really not correlated at all. So like, do you think when oil is driving everything, do you, do you think about those cross correlations or you really like to focus on each asset.
- [20:57]
Katie Stockton
Well, I'd say we, yeah, we focus on each asset. Not entirely in a vacuum, of course. I mean, we're always considering what's going on in the world and in other asset classes. Right. Because they do impact one another, of course, but the correlations we don't rely upon, but we find information and I think that's the way I would put it. So we're not going to say, well, well, this is going down, so this has to go up. But they, they can be really informational at the same time. So you highlighted crude oil and the vix. Well, that's, that's pretty fascinating and I think it's reflective of the current environment and it gives you maybe a little bit of a clue how you should be trading crude oil. If you are. You know, things like that can be really helpful, especially like looking at Bitcoin. We often get questions about Bitcoin relative to say the NASDAQ 100. That correlation's currently very high, but it's not always that. So, you know, it goes from maybe 30% up to 70% at times in terms of the correlation between the two. That's, that's the risk, I think, in relying on these correlations for any kind of signals, but for informational purposes and just to kind of, you know, help you with your shorter term treating, I think it can be very helpful.
- [22:19]
Jack
So this next chart gets in market leadership. And this has been interesting because I believe only two of the Mag 7 outperformed last year. So the idea that the Mag 7 has been driving the market has sort of been changing a little bit over time. So can you talk about what we're seeing here?
- [22:30]
Katie Stockton
Yeah. With the Mag 7, I don't know where I read it, but it's something about the correlations having gone negative with the S&P 500 at a time, which is something that we never would have guessed would happen. So, you know, we had three years of upside leadership pretty consistently from the Mega caps or the Mag 7. And of course we've, we've seen a loss of leadership there, which you can tell by the ratios. So we use ratios to measure relative performance. You're just simply taking a price divided by the S&P 500. So if you look at like a MAG7 index, you'll see that there's not only a corrective phase underway in absolute terms, but also relative to the S&P 500. So that means as the market's gone down, we've seen them underperform and I. E probably exhibit downside leadership, meaning kind of affecting market sentiment. Right. Because these mega caps are so important to people in terms of just how they feel about the market and also their portfolios. Right. They often have an oversized position in investor portfolios just either through the nature of top down type of investment in something like the Spys or just by the nature of people believing in these companies. They're assigned their very high market caps for a reason. Right. People like them. So, you know, I think they're really key to market sentiment. And obviously it's been a bit of a drag and I think it will continue to be a drag on the market until we can see these mag 7's bottom. We had for one a break down from a head and shoulders top in Meta. And Meta previously felt kind of invincible for a while. Right. It just kept going up, up, up. And now of course it's not at all that we've seen a series of breakdowns. The head and shoulders is like a long term topping formation. All, all these technical patterns are named in a way so you can visualize what they look like, but they're all derived from support and resistance levels typically. So a head and shoulders is effectively a lower high and then a breakdown below support level. So not rocket science there, but something visually that would suggest that Meta has reversed course to the downside and has more room for downside follow through. So that's something that I would see as a setback for the major indices.
- [24:59]
Jack
How do you think about the change in leadership or the loss of leadership when you think about the overall market?
- [25:04]
Justin
We've been talking, a lot of people
- [25:05]
Jack
say if the Mag 7 rolls over, the market has to roll over with it. Like we were doing a podcast with Jim Paulson recently and he was making the case that, you know, if it's sort of a calm thing, the market doesn't necessarily have to roll over. We can have a shift in leadership and somebody else can take over. And it's not necessarily a catastrophe for the market if the Mag 7 doesn't lead anymore. Like how do you think about that?
- [25:22]
Katie Stockton
Yeah, I mean it kind of, I think it kind of is a catastrophe for the equity market just by the nature of their footprint. You know, that could obviously change at some point, but I think for right now they do have such a huge footprint or the concentration is so high for the major indices that they really are key to it. And I would extend that maybe even further to the large cap technology sector as a whole. It's still, I think about 32% of the S&P 500. So without that, you know, it's really hard I think for the equity market to shrug it off as measured by these major indices. If you're measuring it in a different way, well, that's a different stake story. An equal weight proxy can act quite differently from a market cap weighted indicator or index like the S&P 500. So I do think they're really key mag 7 and then also the broader technology sector. But when you think about the other sectors that can I guess step in when we see that loss of leadership, they're just not really big enough necessarily to have an impact. I mean energy is going to be one of the most extreme examples right now. It's increased in its footprint of course, with the big breakout that we have seen, but it's not going to be a big enough, I guess, impact on the major indices to get it out of the correction.
- [26:55]
Justin
I look at a lot of 13F filings and I'm always amazed whether it's these, you know, massive wealth wealth advisors or RIAs, you know, some of like the top positions they're in the Mag 7. So even at like the institutional or you know, advisory level, these stocks are a big portion of, you know, investors portfolios like just beyond, just beyond the major indices. To your point, Katie?
- [27:24]
Katie Stockton
Totally. Yeah. I mean I see the same. There is concentration for sure out there. I think even I have it. So. So I feel the pain from that trade right now and it's passive exposure for me. But that's what is at times in this environment somewhat detrimental. I mean it is a testament to having active exposure that can react to these big shifts in trend. And of course any shift in trend behind The S&P 500 is a very closely tied to what's happening with those Mag 7. So there is that concentration. I've seen the same in my conversations and in my clients. And so while we always believe in having sort of core equity exposure, we are a little bit more comfortable with that exposure, of course being active, but then also, you know, not, not as highly concentrated as you know, the major indices are in technology. In particular, Refreshing Wild Cherry Cola meets
- [28:29]
McDonald's Advertiser
Smooth cre,
- [28:33]
Katie Stockton
the treat you deserve. Pepsi Wild Cherry and cream.
- [28:38]
McDonald's Advertiser
Treat yourself. Chronic migraine 15 or more headache days a month, each lasting four hours or more can make me feel like a spectator in my own life. Botox Onobotulinum toxin A prevents headaches in adults with chronic migraine. It's not for those with 14 or fewer headache days a month. It's the one prescribed branded chronic migraine
- [28:56]
Indeed Advertiser
preventive treatment prescription Botox is injected by your doctor. Effects of Botox may spread hours to weeks after injection causing serious symptoms. Alert your doctor right away as difficulty swallowing, speaking, breathing, eye problems or muscle weakness can be signs of a life threatening condition. Patients with these conditions before injection are at highest risk. Side effects may include allergic reactions, neck and injection site pain, fatigue and headache. Allergic reactions can include rash, welts, asthma symptoms and dizziness. Don't receive Botox if there's a skin infection. Tell your doctor your medical history, muscle or nerve conditions including als, Lou Gehrig's disease, Myasthenia gravis or Lambert Eaton syndrome and medications including botulinum toxins as these may increase the risk of serious side effects.
- [29:34]
McDonald's Advertiser
Why wait?
- [29:35]
Katie Stockton
Ask your doctor.
- [29:36]
McDonald's Advertiser
Visit botoxchronicmigraine.com or call 1-844botox to learn more.
- [29:41]
Jack
And it's interesting if you look back to like 2000, that's probably an interesting example because the idea that like value guys like us want to say, well, the value could lead the market higher if these companies collapse. But like in 2000, value did very well, but it did not lead the market higher because the market itself was just weeded down by all these big names.
- [29:56]
Katie Stockton
Yeah, it's a good point. So the relative performance being better isn't necessarily translating into games. So and we have that environment right now, value is doing much better than growth. And that's largely related to the tech sector of course, but it doesn't mean people are crushing it right now in value stocks either. So we have to keep that in mind. It's usually more of like a top down takeaway that when value's outperforming it tends to be a weaker tape. It's not to say you can't find some great setups. I think always it doesn't matter the environment. And you know, there are setups that you can take advantage of on the long side, but it might draw you to stocks that are more like, you know, basing phases or turnarounds as opposed to those that have been sources of long term outperformance. Those are the ones that might be more vulnerable in this environment to profit taking. So normally as technicians we're all about trend following, but because our indicators suggest we have this reversal, even if it's just getting into a range, well then the more interesting setups from a bottom up perspective might actually be those turnarounds and names that previously you weren't really considering. You know, the Last three years or so.
- [31:19]
Justin
Jack, I know that this growth chart is your favorite one in this discussion here.
- [31:24]
Jack
It is. You know, it also. The point she just made is really interesting because, like, as value investors, we don't typically get to do well when the world's doing well.
- [31:30]
Justin
Like, it's not. It's not as.
- [31:31]
Jack
We don't get to have the fun, like, when everybody's having the fun, like, we're not doing that great. And then when everybody's not having fun, we get to do better, which is. Which is not necessarily great from our perspective.
- [31:39]
Katie Stockton
Yeah, no, I get it. And there are indicators that are really quite good for value investors. I know. I think value investors don't typically think of themselves as technicians or, you know, because they think of technical analysis as being all about following momentum. But in reality, there's some great countertrend tools that can give a value investor more confidence in adding exposure into those downdrafts or to help them perhaps identify basing phases. This is where the chart can be really, I think, very helpful. In fact, this morning we noticed that there was some buy signals, and this is not a recommendation at all. But in Nike after the earnings, so when you see a gap down from a stock within a downtrend, it can be exhaustive on the downside. And then we had a couple of those demarc signals fire off at the same time. So that type of input, I think, can be incredibly valuable, especially if you're sitting there as a value investor and saying, wow, this is just a crazy, you know, valuation for this stock, that type of thing.
- [32:49]
Jack
So as value investors, we love this chart here. And I'll put up the chart just in reference. So you are seeing some reason for optimism here, it looks like, in terms of value versus growth. Can you talk about what's in this chart?
- [32:58]
Katie Stockton
Yeah. So, I mean, it had been favoring growth for years. Right. We have what I feel is a pretty significant reversal. And this is something that would further differentiate the current correction from what we saw early last year because of that significant shift from growth into value. Right. It looks more than just a correction if you look at those ratios, and that goes for both small caps and large caps using ETFs for the sake of comparison. So I think that this is kind of a value year. It's a. It's a cycle that. That favors value over growth. And at the end of this cycle, I think we're going to see everybody go right back to growth because they'll want to take advantage of what are probably More reasonable valuations perhaps. So it's just the nature of the markets is to move in these cycles and you could argue that after three consistent years of upside, it's about time perhaps for this ship to occur. What I think is great about it is it does give opportunity for investors to look outside of the technology sector to find opportunities that maybe weren't on their radar. Right. So we've had much more in the way of questions about materials, stocks and utilities and financials areas of the market that seemingly fell off the radar for many investors for a long time. So it gives them the opportunity to seek opportunity elsewhere.
- [34:32]
Jack
Yeah, that idea that everybody will probably go back to growth gets at the next question I wanted to ask which is like how do you think about the term of this? So this is a weekly chart, so I assume this is maybe like an intermediate term type indicator is the idea that the long term trend in growth is still in place, but we're seeing maybe more of an intermediate term shift.
- [34:47]
Katie Stockton
So I would say like, yeah, secular trend favors growth still and just in the same way that this secular uptrend or bull market is still intact for the S&P 500. If you, you know, look at that monthly chart, again, as much as we're talking about the loss of momentum, it's still very much a secular bull trend. Right. And in following with that, the secular trend favoring growth is still there, I would say a little bit more than inter intermediate term that like depending on how you, I'd say quantify that. Like for me intermediate term is maybe, I don't know, around three to four months. So I think we're looking at something a little longer in duration than that. We've already seen it be somewhat longer in duration. So I think it's more of a cycle, right. That Maybe it's a 12 month type of move that we're on the brink of.
- [35:40]
Jack
You mentioned breath earlier. Can you talk to us a little bit more about like what are the breadth indicators you pay the most attention to and maybe what they're telling us about the market right now.
- [35:47]
Katie Stockton
Well that one, that percentage of the of stocks on the nyse above their 200 day moving averages, that as mentioned is like an oscillating measure and we find those very, very helpful when we're trying to identify key lows and highs. So breadth data is to me most helpful when it's at extremes. So when you have these oscillating measures hit levels that are rarely seen, that's when we pay the most attention honestly in between we're not necessarily looking at them all that much unless there's some big divergence or something in like a cumulative advance decline line. We always give more weight to the price action in the indices and on, you know, other asset classes. So the price action really is the most important driver breadth would be secondary or even kind of tertiary to that after we source our indicators for inputs.
- [36:45]
Jack
So is it more like a confirmation type thing? You know, you see what you're seeing in the price action, then you want to look to breath to see like confirmation of what you're seeing.
- [36:51]
Katie Stockton
Yeah, I think that's a great way to put it. So we're always looking for extremes in breath and sentiment and other market internals. But if you think about breath for one, I mean it's a derivation of price, right? So you're kind of getting a derivative away from price itself. And so price is going to be the primary input. The indicators which are also derivations of price will be for us secondary. And then we'll source breath and these other market internals for confirmation. As you, as you put.
- [37:25]
Jack
There's one more for me before I hand it back to Justin. I just want to ask you in general about. Just because we're seeing a lot of it in the news right now with, with certain moving averages breaking and stuff like do you really think of your work as a composite of different things? Because so for instance you'll see we haven't had it now but you'll see like the death cross on CNBC or something and everybody's panicked about the death cross or everybody focuses on the 200 day. Like how do you think about. Are those just one indicator for you relative to your whole tool set or are they more important because people pay attention to them?
- [37:52]
Katie Stockton
I'd say they're, they're not really an indicator but definitely a relevant level in that there are so many people watching them, right? Yeah. Both the 200 day and 50 day moving averages, they're so widely followed and they're in honestly they can become almost self fulfilling at times as either support or resistance. So there is some value to them being widely followed. But in reality they're just gauges of the prevailing trends over different time frames. 200 day will just tell you what the prevailing longer term trend is and the 50 day would be more of a gauge of the intermediate term trend in our work. So they're not so much indicators as they are trend following guides or inputs and then also support and resistance. So when you see as an example a stock take out its 50 day moving average. That's actually a setback that has some, it's somewhat substantial for it and it's a good thing to keep tabs on if you're, you know, watching a portfolio or something like that. I, I think it can be pretty informational. Not necessarily something to react to in your positioning, but something that will give you a sense of what's happening. As an example, if you had a portfolio, 20 stocks and all of a sudden eight of them find themselves below their 50 day moving averages, well then it might be time to get hedged to some degree. Right? You could hedge partial exposure just to manage through what could be a more significant correction. So I find it helpful in that way in terms of just saying, okay, on a kind of a broad basis, are we seeing more of these breakdowns, these levels taken out? And that's in a way even a breath indication, right, that the number of stocks that are taking at these, these levels can be helpful.
- [39:46]
Jack
So I don't need to necessarily panic if I see the death cross. It's just got such an aggressive name, you know, compared to all the others.
- [39:51]
Katie Stockton
It's a great name, honestly. You know, all of the, the price patterns and the Hindenburg omens and things of that nature, you know, they are, they do have good names just to kind of wake people up. But a lot of times they're, they're again, kind of lagging indications of what we already know has been happening. They're not necessarily great market timing devices is what I would say. I would caution people against saying, okay, well there's a death cross. That means I sell. It's, it's not really that simple. And in fact, if you do look back at these so called death crosses which occur when the 50 day goes below the 200 day and both are down trending, that is not usually a great time to sell. In fact, it's usually a bit of a treatable low right around that and then the next relief rally that you want to take as a sell.
- [40:43]
Justin
Let's talk about sectors for a second here. We have the sector returns and the overall market return in 2025 and then so far year to date in the sectors. I didn't realize that energy was up so much this year, which is kind of mind blowing.
- [41:01]
Katie Stockton
Kind of takes you back to 2022, doesn't it? So we've definitely seen a shift and it's largely related to those mega caps falling out of favor because we had communication services fall out of favor there, there's Alphabet right we had also technology, there's Apple, there's Microsoft, et cetera, and then consumer discret, Amazon. So, so all these big heavyweights and the sectors that they belong to have fallen out of favor. So that's what we're seeing in the sector data. It's not all about the mega caps because obviously the energy sector rally is, is much bigger than that in terms of the implications and you know why it's happening. But it is part and parcel with, with this shift from growth to value as well. So, so there's a lot of dynamics that are influencing the sector rotation. But we started to see it in January and at first, you know, you could have said, well maybe this is just some rebalancing after year end. But it persisted and we saw, you know, areas of the market that previously had been pretty persistent sources of underperformance, like utilities, like consumer staples start to emerge from their relative downtrends. So I think it's been pretty interesting. It's not usually a market positive. We've already seen that and kind of suffered that in terms of the rotations that we've seen already. And we just, you know, would hope that at least it's giving us some opportunity to leverage some of these oversold positions. Oversold, but with that upturn. Right.
- [42:48]
Justin
One of the things that I value about what you guys do is you have the research that you're putting out and provide your clients with, but then you also have an ETF that you run where you're sort of deploying this sector rotation strategy, you know, within an ETF wrapper. So in the ticker symbols tack, which is a great ticker by the way, can you just, you know, walk us through how that strategy is, is actually managed and maybe even how it's allocated currently?
- [43:22]
Katie Stockton
Yeah. So TAC is the fairly tactical sector etf. And it is indeed tactical. It's very long term. So I think investors typically again go to, okay, well, technical analysis, momentum, et cetera. This is actually quite a low beta product in that it's equal weight in its strategy. So we take ideally the best eight sectors of the market and that's where we're invested. But it has the ability to use asset allocation when the markets aren't giving us eight sectors that qualify based on our methodology and the methodology as it pertains to tac. It's, we're looking for good, strong, long term trends. So not to oversimplify, but that's what we're looking for and we want to change the positioning if those trends appear to be reversing. So we're somewhat reactive or dynamically responding to changes in trend that have implications beyond the short term. So this is where the long term indicators come in really handy. We're rebalancing the positions monthly and moving around the sectors for the best ones in terms of momentum and relative performance. And when they are not qualifying, we will use their kind of bucket, that bucket out of the eight buckets that we have. So, and we'll put the bucket in a combination of short term Treasuries, long term Treasuries and gold, also using ETFs for that exposure. So it's kind of like an ETF of ETFs which creates a nice tax wrapper by the way, in terms of a sector rotation strategy. So we have, you know, as of a couple days ago we had full sector positioning so we were 100% exposed and yet still limiting drawdowns in this environment, in part because of the equal weight nature of the strategy, but also as a testament to the charts, rewarding the sectors that are doing best, favoring some of the more defensive sectors and then more cyclical sectors in this environment. The timing of our conversation here doesn't allow me to tell you where the positioning will be for April, but it is changing and you know, it's changing in response to what we've seen from a top down perspective and should allow us to continue to navigate this changing market environment and effectively manage risk through not only sector rotation, but also employing asset allocation when it's appropriate. The fund over history has gone from full sector exposure, having those eight best sectors down to just one sector at a time. So that was for much of 22, we only held the energy sector and the rest was in these alternative asset classes. So that has happened and in that sense it is pretty dynamic. The resulting sort of performance is low beta. Participating on the upper side, but not riding those big drawdowns. And that can be so meaningful, I think, to investors whether they're on the brink of retirement or simply need that core long exposure to equities that they don't have to worry about nor trade actively.
- [46:49]
McDonald's Advertiser
Nobody wants to get catfished by dating profiles or big wireless carriers with hidden fees. Your one true match, Visible Wireless. It's One Line Wireless with unlimited data and hotspot for just $25 a month, taxes and fees included. Now that's a green flag. And it's fully digital so you can switch as fast as you swipe. Tap the banner to learn more terms apply. See visible.com for plan features and network management details.
- [47:17]
Onnit Alpha Brain Advertiser
USAA knows dynamic duos can save the
- [47:19]
Katie Stockton
day like superheroes and sidekicks or auto and home insurance.
- [47:23]
Onnit Alpha Brain Advertiser
With usaa, you can bundle your auto and home and, and save up to 10%. Tap the banner to learn more and get a'@usaa.com bundle restrictions apply.
- [47:32]
Justin
Yeah, and I think to the drawdown management aspect of it, which you. We have this chart here that shows, you know, the drawdowns in these periods versus, you know, the, the, the benchmark and, and the S&P 500. And the fund has done a very good job of, you know, having much lower drawdowns. And to your point, I think that, you know, it's during these periods of time in the market where investors behaviorally can make a lot of mistakes. So having a strategy like this that can, you know, manage the drawdown, but then there's a systematic way to sort of get back in is, you know, I think, very attractive for a lot of investors that care about this type of thing, which a lot, most people should.
- [48:13]
Katie Stockton
Yeah. And it's not capping upside right through any kind of derivative strategy or anything of that nature. It's, it's, it's going to be there to, you know, get back in with full exposure when the market warrants it. And that's something that we as humans, I think, have trouble doing. So it's good to have a systematic approach when we're simply letting the trends and the momentum gauges, the overbought oversold metrics and relative strength ratios help guide our positioning because, I mean, we can even just go back to the COVID correction. I think it took a really long time for people to get back to the exposure that they should have had because we were all shaken by it. It just reminded us that the market is not immune to these types of drawdowns.
- [49:03]
Justin
We've talked about equities a lot. What about gold? What are we seeing with the price of gold? I think gold might have had its best. I don't know if it was his best year ever last year, but certainly the performance has been very strong, you know, over the trailing 12 months or plus say. So what is, what are the charts in gold sort of showing us here?
- [49:24]
Katie Stockton
It's been such a strong, almost parabolic uptrend in gold and it is trading a bit more like a risk asset, I feel like these days. And that's yet another reason we, we don't necessarily want to rely on these historical correlations because it hasn't really stayed true to a lot of the correlations that one would expect, the very strong up move has given way to some counter trend indications that actually have implications beyond just the next, you know, few few weeks and even few months. We have a counter trend signal on the monthly chart that would suggest that this year will be an off year for gold, meaning maybe sideways or sideways to lower as it digests those gains that it's posted over the last few years. So I think it's, you know, not necessarily standing in as a great safe haven asset class right now because of the very strong run up that it had before we saw this weakness in the equity market. So we're looking for choppiness, we're looking for consolidation, we're looking for ultimately to serve as kind of like a pause to refresh that secular bull trend behind gold. And we'll of course be watching and you know, waiting for indications of a tradable low. So maybe we'll see a low that we can take advantage of even within the next few weeks. I wouldn't be surprised by that. But I think it's probably best to keep a shorter term time horizon when you see the long term, like exhaustive signals that we have.
- [51:00]
Justin
All right, Katie, thank you very much for spending this time with us. We know it's a busy time of the month, it's the start of a new quarter, so everyone's kind of crunching away. But just in closing here, if you were to sort of sum things up from where we stand from a technical perspective on the equity markets or any market for that matter, what are the most important things that you're paying attention to right now?
- [51:24]
Katie Stockton
Yeah, I'll just say simply the S&P 500, because when we do have corrective phases underway, the correlations do go quite high on the individual stock level. So rather than paying a lot of attention to support levels for individual names, take that attention and, you know, give it to the S&P 500, because most stocks will bottom on the same day as the S&P 500. So if you can get that close, then you're probably going to see succeed on the individual stock level as well. So focus on the S and P, watch for those extremes perhaps in the market internals to help us understand when a low, even if it's just a sort of an intermediate term low, not necessarily a long term one, you know, we can be confident in adding some counter trend exposure.
- [52:17]
Justin
Great. Katie, thank you very much.
- [52:19]
Katie Stockton
Of course, good to see you guys.
- [52:20]
Justin
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 Excess Returns network@excessreturnspod.com if you have any feedback or questions, you can contact us@excess returnspodmail.com no information on this
- [52:40]
Jack
podcast should be construed as investment advice.
- [52:43]
Katie Stockton
Securities discussed in the podcast may be
- [52:45]
Chef Meilin
holdings of the firms of the hosts.
- [52:47]
Onnit Alpha Brain Advertiser
The right window treatments change everything. Your sleep, your privacy, the way every room looks and feels. @blinds.com, we've spent 30 years making it surprisingly simple to get exactly what your home needs. We've covered over 25 million windows and have 50,000 five star reviews to prove we deliver. Whether you DIY it or want a pro to handle everything from measure to install, we have you covered. Real Design professionals free samples, zero pressure right now get up to 45% off site wide plus get a free professional measure@blinds.com rules and restrictions apply or their clients.