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- [00:00]
A
What's up guys? We are back to all time highs in the S&P 500 and I am sitting down with Frank Capillari today. He is one of the best technical strategists I have ever met. He's the founder of Cap Thesis and we get into his favorite sectors right now. Why technology and software look pretty bullish and much more. I think you're going to love this conversation. Frank, I'm so glad you're here today. I have to ask you about S&P 500 7050V shaped recovery. We've come roaring back. What are you watching right now?
- [00:30]
B
Well, thanks a lot Phil. I appreciate it and congrats on all your success here and all your endeavors here. So it's been quite a run. And V shape sometimes I think is thrown around a lot, but this is exactly what it was from a price action perspective especially. So I think it's very difficult unless you've been in this the whole time to say you called it. Because anyone who's participating in this the 100% the way up, probably as a long term investor and that's great. Right. But I look at things, you know, from a chart perspective and try to, you know, advise our clients, you know, more from a short term tactical point of view as well. And so what's been good about this is that obviously market's moving higher and now the more opportunities popping up, I would say the drawdown is that sometimes this move is so fast that it's impossible to really lock in on patterns that will get you there but along the way because the market pulls back and you have a lot of volatility. Volatility is what creates opportunities.
- [01:25]
A
Right.
- [01:25]
B
You know that from just buying the dip mentality, but eventually bullish patterns as well. So one of the patterns that we have identified for the S P 500 has an upside target of 74, 75. Right now that's just using classic measure move. So you take just the, the advance from below to the most recent high and if you get some sort of pause from that, you can create a higher low and then move higher. And so we need a lot more of that to happen now with say for especially technology related ETFs and stocks because those have just been really straight up.
- [01:56]
A
So just to Clarify, you see 7400 as the next level to hit. Is that the way to think about it around that?
- [02:03]
B
Yes, correct. And it's not obviously we haven't hit that yet. So it's up there. So I think a lot of times when we have some higher targets like that, you get a lot of pushback. I think it's like mostly psychological because it's very difficult sometimes for people to come to grips with the fact that how can we expect the next 5, 10% to be higher? We've never gotten there, especially if we failed near 7,000 before, even though we're pushing above it now. We know how difficult it was the first time in January. But I think that really gives you an idea sometimes. You have to sometimes put blinders on to what just happened. And understand in the past too, we've seen this after the COVID lows, see this last April. We see this at, you know, any, any point in the past 2018-19 where you have a huge decline and it doesn't seem like it's going to stop and there's a lot of negative news tied to it. You get that knee jerk reaction. This is more in that right now where you have a ton of 1% moves short covering, people clamoring to get back in. And then what? So I'm in the part where. And then what part. And what you see typically is things start to slow down, right? This pace can continue. You see obviously some profit taken. More importantly then that creates the next phase potentially, which is a low volatility, more trustworthy, persistent advance, just like we saw from May until October of last year.
- [03:22]
A
You know, I've been reading a lot about the similarities between this drawdown and rebound with deliberation day drawdown and rebound. And you can almost overlay the two V shapes on top of each other, which is so ridiculous because the Liberation Day sell off and the Iran conflict, you could argue pretty easily that they've all emanated from the White House like the dip and rebound. So let me ask you about the technology sector right now. I know that this has been leading the rebound that we're sitting in right now. Is this something that you think we should be jumping in on or is it a sort of just a knee jerk as you said, reactions to the geopolitical backdrop here.
- [04:11]
B
Well, I think you have to go back and to understand that technology's been underperforming since October of last year. So basically two earning cycles. May recall there was one of those days when three or four of the Mag 7 stocks reported, all did well, market gapped up, went higher for about two more days and then technology sold off. Now the good part about that was that rotation was fierce right until all the non growth sectors like to call it the field really stepped up and we had some historic breadth with technology not performing. And so even though we'll talk about IGV in a little bit, software really fell off the table. But all the big names didn't participate at all. They weren't really part of this conversation. And so they've been underperforming for a while. We have a chart we're going to talk about is the XLK versus xle, right? Got extremely oversold. Now we know what crude oil has done since then. But that was again that started last fall because energy started doing better and more importantly technology started doing worse. So I think this type of thing where you have a big market turn, that's when the money, the capital comes flowing back into number one, the most popular names, if they're really oversold, those are the ones that get a lot of the demand and you see the big moves. So that's one of the reasons of course that NDX is doing well XLK. But the S&P 500 finally has the support from all the stocks that have the biggest weights in them.
- [05:36]
A
Can I ask you about this? The XLK versus xle. You just mentioned it. Why is this a chart that you pay attention to And I'm always curious about the charts that compare the ratio of two sectors. What's going on here?
- [05:53]
B
That's one I haven't really seen too much, but I've started to track it last year a little bit because that's when you tend to see energy outperform for a few reasons. Obviously inflation related, but it's been out of fear for so long. So there's just a rotation into it. And so when there's rotation into that in a very strong way, it's probably coming out of something technology. Right. And you can't really compare the two in terms of the weights. But I think directionally it's very important. So you know, we can use say XLY versus xlp, right. The consumer discretionary versus consumer staples. But to me this was a much more prevalent trend that was crashing. Right. And now if you were to zoom out, you would see that xlk, of course it's moving higher versus xle. But right particular right here I thought was really fascinating as we're going down that that low, very similar spot on a relative basis to where it was last April. So the point being is how much worse can it be where crude oil is going to spike for how long XLE is going to continue to rally. And I've been trying again not to pay attention to the headlines as Much as possible being like just on a price perspective, that rubber band got so stretched on either side that it was likely to see at least some sort of capital flow back into technology, what may be coming out of xle. And obviously the headlines made that in a very aggressive way. Correct.
- [07:12]
A
So when you're looking at the charts and you're making decisions in the market, you just said you're trying not to pay attention to the headlines. That has been almost impossible since President Trump came back into office. How do you, I mean, is that, how, how do you go about your day to day if you're trying to ignore the news cycle?
- [07:32]
B
Right. It's hard to ignore. So a better way of looking at it is what is the price action doing compared to the headlines? Right. Just in over the weekend, Right. We had some, what looked like very negative news about Iran. And then the market, you know, futures opened Sunday night. There were some, you know, crude oil went higher, S and P futures sold off, but not that much. And then of course that led to now this second leg of this rally. So I think that was a very good indication because price action says a lot and sometimes the news says one thing and sometimes it's like the same new stream that maybe hasn't changed and if it hasn't gotten worse, then maybe that is a positive. So it's kind of like a psychological exercise to do, but you can see how that can sometimes play out. Now this was of course more tricky because back with the tariffs, it was basically just one sided, they're off or they're on, where of course we had to have agreement with Iran and other major players geopolitically to make this happen. Always find it interesting to see sometimes a little bit of that indication of a trend change within the market before you really see it in the headlines.
- [08:40]
A
Yeah, that makes sense. Frank, you have another chart here that you're looking at the 10 year yield and crude oil together. What's going on here? Right.
- [08:49]
B
I think that's an interesting one because it was all you heard about for those past few weeks where 10 year yields were coming in to the year was maybe rolling over. There was the talk of rate cuts, of course. And so then when that completely flipped it was like, oh well, it's crude oil bringing up, making that happen because of the war. And as soon as the war ends it's going to come back to normal. And so I overlaid those two and said, yeah, this is extreme what's happened over the last few weeks. But if you pull that back over the Last few decades. What do you see? Like that the correlation is held for a long time. And so whether it's up or down, it's a major factor with crude oil, of course, being part of energy. Now, talking about CPI though, we say ex food and energy, which, you know, I take issue with because of what's the most important to people. You know, what they're paying for heat, what they're paying at the gas, and what they're paying for food. So I think both of those have to be paid attention to very closely.
- [09:45]
A
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- [11:06]
B
Well, just that and I think that, you know, that was in January and it's just still obviously the sold off continued. And so the reason why I put that in there is because again, I'm a lot of times giving, you know, tactical trading ideas and things. So I think a lot of people started looking at that in particular IGV versus SMH, right? The SMH is the 700 ETF. It was the most oversold in history. And so people wanted to play that as a bounce. I said, what we take a step back and what is IGV doing? And you know, that we're not looking at. So longer term, as you can see there, one of the worst monthly declines since the great financial Crisis, but more importantly I think was that it was coming back into converging support lines. Right. A really long term uptrend line and that log scale and also the spot where it broke out from a few years ago. So right now it's kind of still in that area, maybe a little below that zone. But if you're a long term investor or just, you know, someone who wants to take advantage of a, of a dip within a long term uptrend, this is exactly the type of chart you want to look for because it's not often that you have a huge drawdown like that and you have the luxury of having support from a long term basis as well.
- [12:11]
A
Wow. Do you, I would say if we zoom out a little bit, do you buy into the SaaS apocalypse fears like, has that been convincing to you?
- [12:21]
B
Well, again, the price action says we should be concerned about that, but I think maybe overreaction on the upside initially, overreaction on the downside. So I think now as a technician we shouldn't talk about fundamentals, but I think it'd be very important to see number one what those earnings are for those companies and how they're dealt with. More importantly over the next few weeks. And we'll get an idea. And again, like zooming back into the short term with the igv, it's been trying to make some sort of double bottom here. It's tried before. Right. It's kind of near the same level at the moment that it was in February. And that kind of brings up another point about, you know, psychology where, you know, again, IGV was selling off very oversold. People were trying to buy into it and just got run over. And so to me it's like trying to catch a falling knife at that point. Right. On a short term basis. And so there's a saying in trading is that don't buy the lowest point by the, or don't buy the lowest price by the best price, meaning that if you're buying a low, that low could always go lower. But now here we are now again, say two months later at the same price level. And to me it looks a lot better now because of what it had to go through, get to that point, broke out, fail, tried to break out again. Now we have a more of a base to potentially leverage.
- [13:36]
A
So to translate maybe bullish software now, are you shifting more positive on it?
- [13:43]
B
I think it's, it's the, it was the most bullish setup we've seen over the last six months there because it's trying to now take advantage of of some bullish formations, not just the igv, there are many others in there. And again, seeing how this earnings season does is really going to give us an idea if this can play catch up.
- [13:59]
A
So, Frank, I got to ask you, a lot of investors I speak with, they do not subscribe to charts. Right. And I'm sure you have this conversation plenty. What do you see as the value in chart analysis and technical analysis as opposed to something like fundamentals or other philosophies?
- [14:21]
B
Nothing against fundamentals. I went through the CFA process as well. But I do think in times like this when volatility is fierce, does anyone want to hear about what the company's doing and the outlook as much. Right. Especially if it creates trading opportunities along the way. So I think you have to have both. And I must say, spending over two decades on Wall street, some of my best clients were fundamentally based on, you know, fund managers who understood that just getting a little bit more insight could help squeeze that alpha and that would be like a huge turning point for potentially how their year goes and understands that. Technical analysis charts I think is just one piece of the puzzle. Right. It's a data point that you shouldn't ignore and especially if you into getting the mosaic of your investment process down.
- [15:07]
A
Yeah, I've heard people call it the pulse of the market is what you can see through technicals. And I'm not certified in the technical space. I got a lot of friends that are in the camp of technicals. I would say what are you looking at in the market right now that you are most bullish or optimistic on?
- [15:31]
B
Well again it goes back to technology because it's underperformed for so long again almost six months at this point. And if the market is going to go higher is it needs biggest sector but by far. And so again we talk about the spikes, but mostly if you kind of zoom back out like what. What do these charts look like now over the last six months? And again they're starting to look interesting again. Think about a stock like Nvidia, right. Is it really done? Has it really been a factor for a long time? What if the biggest stock becomes a factor once more and pushes the smh? That's even, that's, you know, obviously making new all time highs even higher. So I think that's a big part of it. The second biggest sector is financials. That has to be a part of this conversation too. And one of the main reasons I think we should focus in now is that it was one of the Biggest sectors outside of technology to start to underperform. In January, if you recall, that's what we started hearing a lot about private equity, but also a lot of these big banks and investment managers, brokerage firms started to report earnings and they just did not get received well. And again, regardless of what they said, it was a reaction that really caused that cascade of things started to really fall apart. So if the market's going higher, we're bullish on technology and the financials which I think are ready to take the lead again.
- [16:45]
A
Do you think that the market is more likely to go up or down for the rest of the year?
- [16:51]
B
I think up and reason is that you can go back in history and see times when something like this has occurred. We just looked at and there's so many studies out there now about it, but just looking at basically a two week rally like this, when does it happen? The biggest moves happen in response to downtrending activity, corrective action, market crashes. And so that's, you know, the initial push from that point as we just talked about that clears that a lot. And again, if history is any guide in there's no guarantee but then we'll start to see the market morph into a more trustworthy, consistent uptrend above these highs.
- [17:27]
A
I'm with you. I am very bullish for this year. In the instance we get a uptrending market, what sectors do you think will be lagging or negative in that scenario?
- [17:38]
B
Well, I think we just have to look at the defensive sectors that held up the most. If you see technology and growth names start to outperform again, it's probably not going to be a good idea to park some money in consumer staples, for instance. That's done relatively well. Be curious to see if materials do well as well because it has some of the names of course that have been doing better from material standpoint, uranium, so forth and so on. So I think a little different animal there, but I think you want to focus on the areas that are growth related going forward.
- [18:11]
A
Yeah, I think that makes sense. When we were coming into the year, I think most investors, including myself were pretty optimistic, pretty constructive on the market. The geopolitics came out of nowhere that you know, obviously took out the legs from underneath the market. Before that happened, were you as bullish as let's say you are sitting here today?
- [18:34]
B
Well coming off of three straight years of basically 20% gains. So it's going to be difficult to replicate that. Especially thinking that that very consistent uptrend that we had was going to Persist, because that was just, I want to say historic, but it was, it was really consistent. Or there was two months in there July and then again in September where. But The S&P 500 had.01% moves on a daily basis. That's pretty rare. Right. The last time it happened was 2019. Before that, 17 and 18 anyway. So probably was a chance of seeing more volatility. Never know what form is going to come in. Right. But you've heard that midterm election year sometimes are difficult like that as well. So again, we can rely on those by, I think more. So, you know, how is the next big dip going to be dealt with? That's the most important thing because we know, just like we knew there was going to be some fish shipping rally at some point, there's going to be a pullback as well. So, you know, investors, of course over the last two weeks especially have been getting rewarded for buying pretty immediately. So I always feel that if you don't have the immediate gratification after getting it for so long, people will just be more impatient and that's when things can roll over again.
- [19:45]
A
Yeah, that's a great point. I mean, pretty much from what I can see since COVID dip, buyers have been right to buy the dip on every single pullback. When you're having these conversations with clients, especially when markets are pulling back, as we've seen with the Iran conflict, what are the worries that keep coming up in these conversations?
- [20:08]
B
Well, whether it's the right time to buy or not. And again, if I'm looking at just particular trading ideas, what I did was just make sure the risk was smaller. And so I'm utilizing classical bullish formations on breakouts. And so typically those worked very well. As you can imagine, fourth quarter of last year, January started to change a little bit toward the end of that month and also February. So we just, you know, made sure that the risk was, you know, not as much. Right to make sure that you could still go into some of these opportunities, realizing that the probability of them working out now has lessened and you can change again. I'm looking at technical trading strategies here, but there's more mean reverting move opportunities as well in a market like that. Whereas you'll start to see bullish breakouts start to work once more. And that just means digestive phases that resolve to the upside. So one of the things I look for is that. But also, you know, how many times does consolidation phase result in a breakdown? So for instance, if we saw a lot more of What IGV was doing on the way down, that would have been a concern. That started to happen. Right. We started to see the XLK break down, ark break down a little bit from there and there were some pretty big air pockets down below that. If this narrative didn't change, those could have gotten hit.
- [21:28]
A
Wow. It's a totally different approach to markets like going through the technical trading lens that I certainly don't have that much exposure to in my day to day work and my writing. Frank, where can people find your work online and what are you writing about mostly?
- [21:50]
B
Sure, it's just capthesis.com you'll find everything there. There's a link to free CAPNOS newsletter that's on substack and also check out some premium services. And so it's just really it's technical analysis based newsletter. We also offer other services to once you become a member as well. So again it's high level technical commentary both on S&P 500 other asset classes and all the way down to specific trade ideas on stocks.
- [22:15]
A
Can you give us some alpha here? Do you have a trade idea for us you could share?
- [22:19]
B
Well, we've been talking more about software names today, so I don't want to talk about any specific names because that's, you know, for our clients. But again, this is what we're identifying. Right. And I will say that something that looks very much like that, that people want to know about of course is Bitcoin and Ethereum, right?
- [22:33]
A
Oh.
- [22:33]
B
So Bitcoin and Ethereum crypto started to fall along with software names at the same time. So now they're all trying to bottom right now. And with, you know, Bitcoin doing well today, if you can stay above the 75,000 zone, have some clear space above that. And then again once that starts to get going, I'll tell you that that's when momentum really takes notice and pulls them higher.
- [22:56]
A
I'm going to keep you for a couple more minutes here. I have a follow up on Bitcoin and Ethereum. Is that something you see going to stay tied to the software trade? Because it's been very closely matching to software for months now. How are you looking at that?
- [23:11]
B
Yeah, I'm looking at that very closely because I think you need to see both of them work and I can't tell you exactly the reasons why, but I think we have to pay attention to correlations for as long as they work. And if say IGV starts to break out and Bitcoin does not, that may be something to consider about. Bitcoin not working that well anymore as a trading vehicle we've seen it pull back it's been a bit different of course than in past years when those crashes have been pretty quick and much more severe but I think maybe that talks to the point where there's more institutional money in there so maybe it's acting more like an equity like trading instrument as opposed to something that no one understands anymore And Ethereum similar. Okay And I'm just looking at the ones that because they're now legitimate ETFs so a lot more people are trading them a lot more eyes on them so I think again you can better pertain regular technical indicators to them as well and they've always been great trading vehicles but again with a much bigger community not focused on them they're a bigger part of the conversation.
- [24:18]
A
Wow. Okay Frank, I really appreciate you taking the time to join me and you can come back anytime you want. This was great.
- [24:27]
B
Looking forward to that. Thanks Phil.