Katie Stockton, CMT is Founder and Managing Partner of Fairlead Strategies, LLC

Yahoo Finance’s Jared Blikre is joined by Founder and Managing Partner of Fairlead Strategies, LLC, Katie Stockton, as they discuss downside exhaustion, beauty of technical indicators, trend following or momentum indicators, and sector rotation strategy.

Video Transcript

JARED BLIKRE: Welcome, everyone, to « Yahoo Finance Uncut. » And I have today Katie Stockton, Founder and Managing Partner of Fairlead Strategies, also a portfolio manager of the TAC ETF. I am Jared Blikre, your host, by the way.

And let’s get down to business and have Katie join us here. Katie, it’s been a while since you and I talked. But I’ll tell you what, you have been bearish over the last few months. I’ve quoted some of your work in my articles when it seemed like things were turning up.

Just want to remind people we are in a bear market. We have come off of the lows very strongly over the last two days. Quick word to our audience– this is a taped program, so we’re talking about price action around early-October here. But we’re going to keep this conversation generalized and very much market-oriented, but bigger picture so everybody can take something away from this. So, Katie, please let me know your thoughts on where we are with this incredible two-day surge in the midst of this big bear market that’s confounding a lot of people.

KATIE STOCKTON: Of course, Jared. And good to see you. I think this bear market has really sort of manifested itself across all risk assets. And that’s been problematic, because it’s almost impossible for us as technical analysts to find stocks or other securities in long-term uptrends where the probabilities are just better in terms of investing for the long-term.

So it puts us in a position where we really are forced to navigate the short-term volatility, the short-term swings in both directions. It’s your right to have said that I’ve been bearish for a few months, really, since late last year, 2021. In October, we moved to a neutral long-term stance and we moved to a bearish long-term stance in January.

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And we did that primarily because our longer term indicators, trend-falling gauges, if you will, things that are typically based off of moving averages of price, but all price-based, did start to show signs of exhaustion late last year. And unfortunately, they’re not yet showing signs of downside exhaustion that are really high conviction at this time.

So we’re assuming that this bear market cycle or downtrend that’s been in place year-to-date will keep its hold at least until we get some kind of basing phase. The reason we think that the bear market cycle needs to end with a base as opposed to in sort of a very quick V-bottom fashion, is because if you just reference past bear market cycles, that’s how it tends to happen.

It takes months, at times, even more than a year, if you go back to the 2000 bear market, to finally find a footing for the major indices. So I think it’s going to be a drawn out process with the emphasis on that word, process.

JARED BLIKRE: Yes. Topping is a process. Bottoming is a process. Emphasizing process– can’t emphasize that enough, because patience is required here. Bear markets tend to last a lot longer than people are prepared for. And that’s, I think, contrary to recent history, where we just saw the fastest bear market in history over the pandemic followed by, I think, the fastest bull market recovery– just kind of a flash in the pan there.

For newer investors who are looking at this market here, they might not have the market memory that other people do going back to 2008 to 2002. And just by the way, I began this discussion with the example of the last two days, this incredible surge that we had here.

I hadn’t seen anything like that in a while. So I crunched the numbers real quickly and we saw that in Q4 in 2008, but we didn’t see the low until several months later in March of 2009. Very similar story for the crash of the tech bubble in 2000. We saw that bear market take two years to play out, got a number of signals in between there.

But just what are you looking at if you’re not looking for that V-bottom, you want to look for the base. S&P 500, you were noting, I believe, 3,200 is a possible very bearish downside target here. 3,815, we left that last week. So where are you seeing this play out now?

KATIE STOCKTON: Yeah, I mean, it’s more than just about the levels, right? We really need to adhere to the indicators, first and foremost, and wait for them to signal some kind of entry. And we do rely on them for that. So the S&P 500 has some support around 3,500.

It’s apparent that the summertime lows are really not a strong support level, even though we’re getting a bit of a bounce here in early-October. We’ve seen so many stocks from a bottom-up perspective break that equivalent support at the summertime lows. We’re trusting that the major indices will do the same.

And for the S&P 500, the next support level is around 3,500. It’s not a major level. It’s sort of an interim level in our work with the next major level around 3,200, as you referenced. And that’s based on a long-term Fibonacci retracement level. It’s pretty widely followed as a support level for various reasons.

But importantly, if and when we test that level, or even before then, we’re really going to adhere to the indicators to flash some kind of buy signal. And that’s the beauty of technical indicators is that they do take out some of the gray area of the markets and they will actually show crossovers or have interruptions in their down moves that would suggest that the market is getting into sort of a bottoming process, or, at a certain point, is ready to advance from that basing phase.

And we have ways to try to measure that– things like the stochastic oscillator, things like the MACD indicator for all the technicians out there. Those are a big part of our process.

JARED BLIKRE: You mentioned stochastic, MACD. I know you also mentioned Fibonacci. I know you’re a fan of DeMARK. And Yahoo Finance, by the way, has a lot of these indicators for free on our website. Encourage everybody to test them out.

But I like to keep these market conversations somewhat broad and get into the theory behind everything. And you are a CMT, which is charted market technician, as you have been for a while now. And can you just talk broadly about, or specifically, about some of the indicators you like and why?

And I just want to get into the conversation– with hundreds and hundreds of indicators, there are some that are very widely known, some that are less well known. But it’s up to the individual to find what works for them. And I’m wondering what works for you and how you’re seeing things.

KATIE STOCKTON: Yeah, I think there’s a couple of key points that I would make about our methodology or the way that we approach the markets. And first is that we approach the markets, at least the equity market, from a top-down perspective. Meaning that we start with the big benchmarks, right? The S&P 500 is our best example of that.

And then we sort of drill into the sector– relative strength, what sectors are outperforming, what momentum is looking like on the sector front. And then we take that and we drill into the individual stocks that comprise the major indices. And that gives us that kind of holistic view of top-down and bottom-up.

We want to make sure that bottom up work is essentially supporting what we’re seeing top-down. We believe that the top-down influence of the market is very strong for most individual stocks. So to have that understanding of the directional bias of the S&P 500 just puts you in a better place to succeed in your trading or investing.

And I would say that maybe 70% of move in any given stock is driven by the broader market and it’s sector. That’s something that Tom Dorsey taught me a long time ago. And that’s really important to note. It just means that fundamental analysis is going to be very important, especially in bull market cycles. But there are times at which, especially during a bear market cycle, that the broader market is just going to drive that stock against your sort of fundamental biases and you have to respect that price action.

JARED BLIKRE: And we’re talking about the general market here. S&P 500, the benchmark– lots of other markets to consider, though, especially lately. We’ve seen the US dollar strengthen considerably, although it’s backed off of those highs. And I think that’s been at least a big part of the risk-on story that we’ve seen over the last few days.

But more broadly, incredible tightening of financial conditions, as they call it, stronger US dollar, higher interest rates. Everybody finally kind of buying what Chair Powell has been saying is that they’re going to raise rates until something breaks. How are you viewing some of these other markets right now, specifically currencies and bonds?

KATIE STOCKTON: Yeah. And I guess that’s really part of our top-down process too, to your question on the methodology. We do incorporate analysis of anything that is somewhat macro, but we view it from a technical perspective.

So when we’re looking at the dollar index, we’re looking at it from a trending perspective. Same thing with Treasury yields, and gold prices, and crude oil prices, all of which, of course, influence equities. And from a trending perspective, and to this end, we’re using these sort of trend falling or momentum indicators like the MACD– we are seeing very strong uptrends in Treasury yields and also the dollar.

And I think we have to trust that those uptrends will keep hold until they prove us otherwise. In the near-term, it’s looking like consolidation or further consolidation is likely. And it’s not a very difficult call to make after the strong run-ups that we’ve seen. But we did have some signs of short term exhaustion there behind the dollar index and also Treasury yields that are supporting some consolidation within the context of their uptrends.

And of course, with that, we have the potential for oversold bounces in Treasury bond prices, and, really, some stabilization there in relative strength terms versus the equity market or the S&P 500. In this kind of environment, we’re always looking at relative strength as well.

We’re looking for spots of strength and weakness versus the broader market. And with that, we tend to just use price to price ratios. So we’ll look at something like gold or an ETF representing gold, divide that by the S&P 500, and look to see if it’s outperforming, acting as a safe haven, which it has done most of this year. So we like to try to find those relative strength sort of spots and emphasize those in our positioning or recommendations.

JARED BLIKRE: I happen to like relative strength a lot myself. And I’m wondering, are you using it to help you find entry points for if you’re trying to go along with one of these bounces when you do? Or are you looking for the eventual bottom when you do find or think you’ve seen that bottom, are you going to be looking at relative strength in the sectors or in different styles to help you gauge what exactly you want to buy when it looks like the overall market is finally turning up?

KATIE STOCKTON: Yeah, for sure. We’re always going to watch relative strength for this sort of macro technical input gold versus the S&P 500, for one. And also on the sector front. In fact, it’s a big piece of our ETF, which is called the Fairlead Tactical Sector ETF, or TACK as the ticker. That ETF is looking at the relative strength and momentum behind the various sectors.

And it’s poised to remove itself from those sectors in an environment like this. In fact, right now, it only has exposure to energy, at which time it will move more risk-off with positions in short-term treasuries, long-term treasuries, and gold proxies. So that’s something that’s very important to our process.

And we do tend, in bear market cycles, to see underperformance, especially from the technology sector. And that’s certainly been the case this year. And yet, when we come out of those bear market cycles, we expect technology and, often, consumer discretionary, and, perhaps, to a lesser degree, communication services to be the sources of relative strength in the earlier stages of that sort of newly-established bull market.

So if we were to see meaningful improvement in relative strength behind technology, we would see that as a positive development. And that’s something that our ETF would pick up on, ready to add exposure back to the sectors as they regain their momentum. And various ones will pick up some relative performance.

JARED BLIKRE: Let me ask you, let’s stick on the TACK, T-A-C-K ticker, ETF– fairly tactical sector fund. When you’re talking about your top-down approach, how mechanical is this? Is it discretionary? How did this come about and how does this represent your thinking when you have this product to offer your clients?

KATIE STOCKTON: Well, it is discretionary, but it’s systematic– and 100% systematic barring some crazy event. So we hope not to have to change–

JARED BLIKRE: We have those every once in a while here in the modern markets. We do.

KATIE STOCKTON: It’s true. So we reserve the right to change the model if we are forced to do that by the market. But the model is based on our methodology. And it’s designed to leverage exactly what we discussed, which is those sort of sector trends, momentum and relative strength behind them, and then has the ability to move more risk-off with alternative asset classes, including the short-term treasuries, long-term treasuries, and gold, using ETFs to represent those spaces.

We found that a lot of investment advisors, especially, were trying to do something like this themselves sort of a sector rotation strategy, agreeing with us that the best way to outperform the S&P 500 is really to be in the right sectors. The spread between sector performance every year is just massive. And energy is a great example of that over the past two years or so– just the outperformance there.

So if you had underweight exposure to energy, naturally, that puts you at a disadvantage versus some kind of just straight sort of market cap exposure to the S&P 500. So we try to emphasize that relative strength. And that way, we create sort of, I guess, a systematic way for investors to basically be exposed to the market when the market dictates it. But to be more risk-off, to protect from very steep drawdowns, of which we’ve certainly seen this year.

JARED BLIKRE: Let’s talk about the precious metals, because gold and silver finally perked up very recently. Now, they have before this year, but we’ve seen all kinds of bounces met with heavy bouts of selling. And a lot of this is hand in hand with the declining dollar, which we’ve also seen recently.

But do you think these legs, are you seeing anything in the technical indicators that give you at least some sights that these moves in gold and silver have legs finally? Because they’ve frustrated a lot of investors to the downside when all everybody’s hearing is inflation, inflation, inflation. It’s overly simplistic to say buy gold at that point, but do the technicals– do the technicals finally confirm maybe what people have been thinking?

KATIE STOCKTON: Yeah. I mean, listen, there are intermediate-term down trends in place across the precious metals complex. And it’s been as frustrating for us as the next person. Abbott Gold, as a commodity, has come into a very long-term support.

For us, it’s about $15.93 per ounce. And it’s based on something called the monthly cloud model. It’s a model that tends to lend itself very well to commodities and effects in particular. And so there is some long-term support.

We don’t feel like there’s a major breakdown there at this time for gold. And now it seems to be reacting alongside silver, platinum to this intermediate-term oversold condition finally. And at a very minimum, these 50-day moving averages look surmountable.

But it’s still too early to suggest that they’re reversing their intermediate-term downtrend. To that end, we’d need to see intermediate-term momentum shift to a greater degree than we have to this point. So we’ll be watching our indicators. There’s some, certainly, positive short-term action there. But it’s too early to call these bullish reversals that are lasting in nature.

JARED BLIKRE: And you mentioned the cloud there– not cloud computing. I believe you’re referring to Ichimoku clouds. And I’ve seen these pervade your analysis. And really interesting, I stumbled upon these a long, long time ago.

And I think the market history is there was a Japanese investor in the 1940s, maybe even a little bit before, who back-tested by hand these very complicated sets of rules and drawings with respect to the Ichimoku clouds. And after back-testing these on the Japanese market over years and years, people are still using them today. A picture is worth a thousand words.

So we’re going to put one up here in a second. You won’t be able to see it. But just describe generally how you use the cloud. And you could use gold as an example.

KATIE STOCKTON: Yeah, it’s a great long-term trend-following gauge. So we put it into that sort of trend-following category. It’s also useful as a gauge of support or potential area of buying pressure and resistance, or potential area of selling pressure. And we look at it across time frames.

So right now, gold would be below the cloud on the daily chart. So short-term, it still has that resistance. On the weekly chart, it’s also below. So that means that intermediate-term to longer term trend is lower.

And yet, on the monthly chart, as mentioned, that cloud-based support is still intact. So we’re looking at where price is relative to the cloud itself. We’re looking at the cloud as potential resistance or, in this case, for gold on the monthly chart, as support.

And like you said, you said a picture speaks thousand words. I think the Ichimoku in Japanese, and forgive me if I screw this up, but I think it means something like one look. And it’s one complete look of the overall trend and support and resistance. And it’s been in use from what I understand is even centuries.

So it’s really very valuable to us. And for anything that has sort of deep global liquidity to it, that’s where it especially can add some value.

JARED BLIKRE: I have to tell you, I was googling Ichimoku cloud and, yes, one look is literally what it means there. And just amazing that somebody was able– or multiple people were able to do this by hand. And also, I would mention when these markets were trading seven days per week over there, still applicable.

Let me switch gears. You got your start, and I’m reading over some notes you sent by email, at Dorsey Wright. And I believe they’re still part of the NASDAQ. And you were charting point and figure charts.

Now, this is also something that if somebody hasn’t seen a point and figure chart, they might not even know what it is. But it represents market information. And it’s just a different way of looking at things. And it really captures trends in a way that traditional charts that we’re used to looking at don’t. Maybe you could get into that a little bit.

KATIE STOCKTON: I love point and finger charts. And if anybody hasn’t seen them, they’re characterized by X’s and O’s. And X’s is when the price is going up, and O’s is when it’s going down. So it looks like a big sort of tic-tac-toe sheet.

They’re really valuable in that they help eliminate some noise. So in a way, what I’m doing now, while I’m not using point fingers anymore, I am using moving averages quite a bit, and some short-term ones, especially. And their design is to minimize some of the noise and help you smooth out the prevailing trend, and also have a sense as to whether it’s reversing.

And I think that’s where we can get real value from these point finger charts, to which I certainly credit Tom Dorsey, to mention his name again, for teaching me that discipline, and also just teaching me the value of hand-charting really being close to the market, to understand the day-to-day price moves and their influences in terms of the indicators that we’re now using today.

So really valuable to study them. They’re not quite as digestible, necessarily, to everyone in that they’re just such a different format. So we now sort of gravitate towards the bar charts, which are a little bit more digestible. But both still have value and really great for identifying breakdowns and breakouts.

JARED BLIKRE: Yes, definitely unorthodox. One thing that strikes me here, and I’ve noticed a few other people that I’ve interviewed in this « Yahoo Finance Uncut » series, is you were doing this by hand back in the day. And some people still do it by hand– Helene Meitler is one of the names on Twitter that still does that.

How important do you think is it to really get your hands dirty and understand the nitty gritty behind some of these indicators, behind some of the chart to be able to understand what these charts are representing? I think it’s easy to look at a chart and say, well, the direction is up, but there’s a lot of nuance in there. And you have different types.

Personally, I like candlesticks because of the depth of information. You can see rejections and support levels more clearly. Just talk to me in general about your background and, I guess, in how you’re seeing the market, and how you develop this with a hands-on approach.

KATIE STOCKTON: Yeah, that hand-charting experience was invaluable. I mean, it just is the best way to stay close to market action. Of course now we have so much more capacity with all the software available to us. And we do a lot less of that.

But if I were an investor or trader and had sort of a concentrated portfolio, not a long list of names but a short list of names that I was active in, by all means, I think it’s a great exercise– whether it’s point and fingers or otherwise. I think it’s just the best way to stay close to things.

And I also like the candlestick charts because I think they show a bit more of a complete picture in terms of the body versus the tails of the highs and lows for each bar. We use the bar charts in part because we’re publishing technical strategy research and we need the space.

JARED BLIKRE: Yes.

KATIE STOCKTON: You know, the candlesticks are a bit wider. And so we have some space constraints in our research that sort of got us away from that. We just couldn’t fit them on the page. But they are also very valuable.

I wouldn’t down, honestly, any technical indicators. There’s not any Holy Grail, of course, out there in terms of technical indicators. It’s more about how you’re using them, how you’re applying them. I mean, if you do it systematically and you’re coming back to the same tools, the same discipline, I think that’s where you can get the most value out of it.

JARED BLIKRE: I like what you said just there. I want to expand on it. There’s no Holy Grail. Because you look on Twitter, and I’m getting ads all the time for a bunch of Holy Grails that I know are junk and they’re not going to offer me any advantages. But talk to me or just maybe talk to the viewers here– what kind of filters should people be wearing or seeing when they’re looking at somebody who’s selling them, whether it’s a strategy for trading, whether it’s a solicitation for their money and they’re going to trade it– because there is a lot of snake oil salespeople out there.

There are, unfortunately. And there are some great indicators, there are some great firms. I put you among them. But there is a lot of noise as well. So how do you sift through that?

KATIE STOCKTON: Yeah. I mean, that’s hard. I would always approach any of that kind of unsolicited advice with skepticism. That’s always healthy anyway. And what I always recommend to the people that I talk to is that if you can just kind of hone in on a couple of people that you respect in terms of their advice or even a couple of tools or methodologies that resonate with the way you think about the markets or the world, I think if you can just hone in on maybe two of those, that will be the best way to reduce all the noise that’s out there.

What’s hard is if you’re trying to make a decision and you’ve got five, six different sort of things in your ear in terms of different biases, you’re going to get your confirmation bias there where you’re just going to listen to the one that makes the most sense to you. But if you just can kind of narrow in on things that suit your way of thinking and also always be skeptical on those unsolicited inquiries and what have you, I think that’s the best way to approach it.

And also, to have multiple disciplines sort of behind your investing, we believe technical analysis is really the best complementary discipline to both fundamental and macro research. We think that technicals will help you understand what the prevailing trends are, what is risk-reward. But technicals will not tell you anything about the companies if you’re investing in stocks.

They won’t tell you anything about the Fed if you’re investing off of macro inputs. So I think to have kind of that holistic view of the markets is really important as well, and to reward each discipline for what they’re best at.

JARED BLIKRE: Sounds like a lot of work. And it is. If you’re going to be trading your own money, I think it’s important for people to realize that you’re going up against some people who put in dozens, and dozens, and dozens of hours and billions of dollars. There’s a lot of money in this. There’s a lot of time in this.

And on a short-term basis, I think people are kind of competing against each other as traders– kind of a zero-sum game in the short-term. If you’re a passive investor over the long-term, well, yeah, a rising tide lifts all boats. I like to talk about risk management in these webinars here.

And I think this would be a good point to do that in. How do you view risk management? Because the average person, the average trader, especially newer traders, don’t really come in with a set plan. And they’re just kind of backfilling the details later.

Short-term trades turn into long-term trades when they go against them. What’s your approach to risk management?

KATIE STOCKTON: Well, in a bear market cycle, obviously, we want to be hedged or just underexposed entirely to the equity market. So that’s where we start. We start with a top-down input as an understanding of how exposed we want to be.

So right there, you’re getting the inherent risk management by just having a long-term trend or bias on your side make sure those long-term indicators are supporting or otherwise your positioning. So that gives you an advantage right there.

And I believe it was 2008 that, really, a lot of technicians got a good name and sort of became more prominent because they were beating the market. They were doing better because they avoided the big drawdowns, or at least sort of sold closer to the peak.

And they did that by tracking long-term trend-following gauges. And so just having those on your side is going to increase your probabilities for succeeding in the market. So to have that bias is important.

And then if you are taking any counter-trend positions to keep a shorter term bias on those counter-trend positions is important, because they are counter trend and they’re likely to ultimately give way to the prevailing trend resuming. And then also, of course, some kind of stop-loss discipline. The stop-loss discipline, it’s not going to be the same for everyone, but it’s important to us– we like to see a support level that’s well defined, that’s not too far from our entry point, and to make sure that a break down below that support level would be a trigger to stop us out of that position.

So to always have defined risk, and for us, based on support. For others, it might be based on a percentage stop-loss. There’s ways to do it that’s automated. There’s ways to do it that’s a little bit more subjective, like we do.

But there just has to be some way to manage downside risk through a stop-loss discipline. So all of the above is very important. But really just key to have those long-term trends on your side.

What we notice is that in a bear market cycle, the bear markets capture some of the biggest up days over history. So you have these, and I guess to the point of what’s happening with the markets right now, this oversold bounce– these big up days can be really fast and furious.

And unfortunately, when they are, that’s more characteristic of a relief rally as opposed to the beginnings of a long-term turnaround. And that’s the case vice versa. In an uptrend or bull market, you’ll see really fast and furious pullbacks.

And they feel pretty awful, but they end pretty quickly. We felt that a lot preceding this bear market cycle, that pullbacks were very quickly met with buyers.

Well, on this side of things, unfortunately, a lot of these relief rallies are very quickly met with sellers. I think the best comparison that we have to the very current short-term environment is late May when we saw a bounce unfold. And, really, the bounce was maybe four or five days in duration.

And you know, it’s really, let’s call it a fleeting bounce. And that kind of thing can really be frustrating for investors. So to have a way to navigate those bounces and to leverage them, to use them as selling opportunities– the best way to us to do that is by just tracking the short-term indicators and, again, making sure they’re also on your side.

JARED BLIKRE: Great, great discussion here. You mentioned prevailing trend, stop-losses. In terms of risk management, how about position sizing? When you’re getting into a trade, what are you thinking? Do you want it to be a certain size in your portfolio to max out at a certain size? If you have some huge gains on it, will you actually trim the position as those gains are made so that it takes up a smaller part of your portfolio? Different people, different strategies.

KATIE STOCKTON: Yeah, I mean, that’s hugely important. I call it portfolio construction. I would say that technical analysis isn’t necessarily where that comes from. But it can certainly be one input into your position sizing, because you can derive levels of conviction from the indicators and from the setup, certainly. And that level of conviction can then be translated into a position size.

But of course, that’s sort of a bigger story in terms of having the risk metrics in place and the controls in place more from a portfolio construction standpoint. In developing the model behind the TACK ETF, of course, that was a consideration. We took some outside counsel on that point just knowing that it wasn’t really directly our discipline.

And we came to the sense that the equal weight positions in the various sectors– so we have the economic sectors of which we’re allowing for eight positions– so we will equal weight those positions at about 12.5% when the market is firing on all cylinders. We’d have eight sector positions all equal weighted.

But that’s a decision that stems from our strategy trying to emphasize the smaller sectors that are outperforming, like, in this case, energy, while sort of having more equal weight exposure or in-line exposure to most others outside of technology, which, of course, has such a big footprint in the market these days.

JARED BLIKRE: We talked about your ETF briefly before, and I wanted to expand the direction of the conversation, the scope of it to include your founding of Fairlead, your current firm, in 2018. You got your own shop. I believe it’s female-only. Speak to that if you would like.

What brought this about? And how are you enjoying having your own shop in the midst of this market environment, what emerged to be throughout the entire pandemic as well?

KATIE STOCKTON: Yes. Fairlead Strategies, it is nationally recognized as a small, women-owned business. And that obviously differentiates us. It’s still a male-dominated field that we’re in here. And yet, really, what our primary focus is on adding value to our clients through our research, and through our consulting services, and then, of course, offering the ETF as an investable product, a way to kind of express our views by actually picking up some shares of the ETF.

So our business has grown nicely. I’d say with the downside volatility comes higher demand, because people are asking more questions. And this is where there is a bit of a gap, at times, between the fundamental sort of prowess of a company and the way that’s translating into the stock’s price action. So it does raise some questions.

It tends to draw folks to technical analysis. And we’ve definitely noticed that in our conversations and in our subscription growth. But Fairlead has been a great move for me. I spent most of my career on the sell side working for broker dealers on Wall Street. And that was really invaluable experience.

It helped me understand how to serve clients and really gave me a broader understanding of the markets and how to approach them from my perspective, but also how it fits in sort of the big scheme of things in terms of technical analysis, alongside these other disciplines, which are also so important.

JARED BLIKRE: Yes. And we were talking just before the show about some of your experience with your own firm. I asked you if you were getting a bunch of calls because of all the volatility in the market and you said, well, not necessarily. Our clients know where the market is and what’s going on.

I don’t want to put words into your mouth, but it sounds like you have some fairly sophisticated clients here where, compared to some of the people I talk to who are just fielding calls left and right, is it time to get out of the market? Should I be buying more? Panic clients. Not what you’re experiencing here?

KATIE STOCKTON: You know, I think it’s all about staying communicative. And if the clients feel that they know what your views are, then they’re less likely to have to come to you with questions. We have found that a lot of our clients, many of whom are investment advisors themselves, they are getting a lot of questions because they’re actually holding client assets.

And of course, their clients are probably in sort of worry mode right now. Many of them are seeing their portfolio shrink, and that’s upsetting to them. So naturally, they’ll lob a phone call into their advisors.

But we don’t hold client assets in that way. So we’re not fielding those types of calls. But we definitely sense that well, one, I do think our clients are quite sophisticated, but it really runs the gamut. Some are very new to technical analysis as well. And I just think it’s a matter of always having a very clear technical sort of takeaway from the methodology that we use and making sure that people understand not only how you feel about things, but where that is coming from so that they can make their own decisions with the full amount of information available to them from our indicators.

So we try to make sure that people know where we’re going. And yet, we have no crystal ball. So we are just kind of in the markets with them and trying to put more probabilities in our favor.

JARED BLIKRE: Yeah. You just said no crystal ball, and that is the truth. Nobody has a crystal ball. But we can outline what we believe to be certain scenarios and assign probabilities to them. And just getting back to the discussion about separating some of the good from the bad out there in terms of who’s offering what in trading strategies, and advice, and what have you, I’ve noted over the years that the people who I trust the most tend to think in probabilities.

And they express themselves this way. Whereas people who express themselves in absolute, like, the gold bottom is in, you have to buy something now– crypto is taking off for the next 12 months– a lot of these calls, while they stir the soul or whatever have you, they might get you, entice you to press buy button, they’re not necessarily the sagest advice.

And then meanwhile, you have people who are kind of telling it like it is who don’t necessarily grab the headlines, because, while they don’t necessarily have that certainty, but that’s really what it’s about. So I’m wondering what your view is as somebody who’s inside the industry and has to deal with that.

KATIE STOCKTON: Yeah. I mean, we’re very mathematical and sort of level-headed in how we approach the markets. Because these are technical indicators. There’s no story behind them. They, at times, are even binary. They’ll be on a buy signal, or a sell signal, or positive, or negative.

So we feel like, in a way, we’re just reporters ourselves, just imparting the takeaway from this combination of indicators that we’re using. And there’s not really a great way to sensationalize that. And that might be what would grab a headline more so.

But importantly, this is real money we’re talking about, we’re investing in. So we want to take it really seriously. And also, that systematic approach, I think, is where we find the value in it. And again, that goes for ourselves as the portfolio manager, but also in terms of the advice that we’re presenting.

I do think it’s important for folks to just put the trends on their side– so starting long-term and then drilling into the various time frames. So we’re concerning ourselves over the multiple time frames just to help all different types of clients know how best to navigate the volatility. We have some that might be interested in counter-trend exposure to leverage some of these strong relief rallies, and they tend to be more nimble and more aggressive, trading leveraged ETFs.

And then we have some that are just long-term, more passive, buy and hold type investors that are just out there trying to minimize some of the drawdowns, or trying to find some opportunities after this bear market cycle.

JARED BLIKRE: I like what you said there, that you kind of relate to your work as a reporter. You’re just reporting the story that is told by the technicals, and not necessarily the opportunity to sensationalize. Although I would say I’ve seen a lot of headlines regarding the death cross, the golden cross. That’s kind of a sensationalized way of maybe describing certain moving average crossovers.

But for the most part, yeah, technical analysis can be very, and should be, arm’s length here. I was going to go in a different direction here. Oh, we were talking about– I think we touched on analogs before. You have a market analog. I’m looking at a chart of the VIX. This goes back many years.

And you’re looking at potential similarities between the situation we found ourselves in 2007-2008 with the VIX and today. And we really haven’t hit a longer term spike. So I’m wondering what you’re seeing in this chart itself, and also what this means just in general– what you look for in market analogs, if you would extend this, for instance, to the S&P 500 or something else.

KATIE STOCKTON: Analogs can be pretty dangerous, right?

JARED BLIKRE: Yes. But history can rhyme. We know that, or else we wouldn’t be doing technical analysis. And there are times at which some of these setups will just remind you of something. And that’s what happened for us with the VIX or the CBOE Volatility Index, which we use as a transactional gauge of market sentiment.

And some folks were getting comfortable with them– I guess the position of the VIX not having spiked. And we just looked back over history and we found that if, indeed, it’s a bear market cycle that we’re talking about, and I don’t think anybody would argue against that at this point for the current cycle–

JARED BLIKRE: Hope not.

KATIE STOCKTON: These cycles really have always culminated with the VIX reading close to 50, if not 80 to 90, like we saw at the end of the 2008 bear market and during the COVID, I call it a corrective low. But I guess, technically, it was a bear market– a very swift one.

So those high ratings in the VIX show fear in the marketplace. And we would argue that the fear has not been terribly high as of yet. We see a VIX resistance level around 35. And that was very reminiscent of that period in 2008 or ahead of the late-2008 decline.

So we’re nervous about the setup in the VIX where we are actually looking for short-term contraction in volatility, which would mean that the market can bounce here. After which, the market would be potentially set up for a pretty big volatility spike. We hope it’s more like 50, not like 80 to 90. And we think it’s probably more likely the 50 area.

But even that first 50 reading during a bear market cycle, it doesn’t really tend to be the end of it it. It tends to be the beginning of that bottoming process. We often see another VIX reading in that kind of range within the next year or so.

So I wouldn’t take a lot of peace of mind with the VIX 50 reading to say, this is it. It’s all over. But rather, let the momentum gauges guide us in terms of a longer term turnaround.

JARED BLIKRE: Anything else you’re looking at in terms of market internals, stuff below the hood? Maybe the VIX futures, term structure– anything. We can get as wonky as you want. Just wondering what you’re actually looking at besides some of these top level indicators and markets that we’ve been talking about.

KATIE STOCKTON: Well, we look at a collection of market internal measures. And they’re really kind of tertiary in our methodology. We’re first starting with support and resistance. We’re using the indicators. And then we’re consulting the market internals, which would include the VIX.

And those market internals will give you takeaways in terms of what is breadth, and sentiment, how is leadership, is volume showing some kind of emotional trading. All of that can be a great color to have.

And we really do perk up and get interested in it when we see a lot of them at extremes, and extremes that are just compared to historical overbought and oversold levels for those indicators. So we look at them collectively, because what we’ve found is that if you highlight just one market internal measure, and that becomes your primary tool– like, I think a lot of people were talking about breadth thrusts in that sort of summertime relief rally, well, that certainly had no lasting implications for the market.

So there was risk in just adhering to that one sort of market internal, whereas if you can take them together and get more of a diversified look at those market internals, I think there’s more power to that and a little bit more safety to that as well. It’s when we see a collection of these readings that we really pay attention.

JARED BLIKRE: And any markets like– I know some people are looking at the high yield market right now, they’re looking at transports– anything you want to see perk up and lead the market out of the eventual bottom when you think you might have seen it base?

KATIE STOCKTON: I think it’s important to keep an eye on the dynamic between the mega caps and the major indices, and then also the higher growth benchmarks. The higher growth benchmarks, like an ARK ETF is one example. They’ve been trending lower in some cases since early-2021.

And because of that, they’re more oversold on a long-term basis. And some have even seen upticks in our longer term momentum gauges, meaning that as they’ve come down, they’ve seen, like, little upticks in the histograms and what have you. And that could be the precursor to a bottom in those areas.

By no means are we recommending adding counter-trend exposure there, because we think the bottoming process will be drawn out. We think we’ll see even new lows cut out by a lot of these benchmarks. We already have seen it from a bottom-up perspective.

But importantly, we think that they’re trying to find their footing. Whereas the downside leadership on the next downdraft is more likely to come from the mega-cap space on their relative strength posture. And just based on their posture more broadly in terms of these long-term indicators, which rather than showing any incremental improvement, they’ve just been deteriorating, and deteriorating for months, and diverging to the downside. So that would be the likes of Apple and Tesla– names that folks have found safety in in the past.

JARED BLIKRE: I was going to ask you specifically about Apple and Tesla, since each one of those seems to be almost their own sector or asset class. The way people view them, very important to the market. Any others out there? Alphabet also big, Amazon also big, but not necessarily the cachet. What are you seeing in terms of some of these other mega caps?

KATIE STOCKTON: Yeah, I mean, they’re all somewhat similar in that they’re in downtrends year-to-date. But those downtrends have various levels of maturity. The Meta downtrend, for one, it looks a bit more like a high growth stock than the rest of them.

Amazon is somewhat interesting to us because it does have a longer term support level nearby. And we’d like to see some basing before we believe that that support is going to act as a cushion for the stock. But we’re keeping an eye on some important levels for Amazon.

And then Microsoft and Alphabet, they’re really very highly correlated to one another. And they have fairly recent breakdowns below their summertime lows, which, of course, just tells us that their downtrends are still intact there. And with that, we’d be a better seller if oversold bounce and just in general until these downtrends start to really culminate in that kind of basing phase.

JARED BLIKRE: And there’s also Berkshire Hathaway. Wonder what you’re thinking of the value trade– financials and energy really picking up. Well, as we talked about before, energy just outperforming hands and above anything else this year. What do you think of some of the value trade? And is that something you might be looking to get into more?

I know you’re going to look at the technicals as they present themselves in the moment. But is that something that you’re really keeping an eye on now, maybe with your macro view, expecting some of that to continue?

KATIE STOCKTON: Well, we’ll look at that sort of ratios between growth and value. And value does look like it should outperform growth until this bear market cycle really culminates. And there’s going to be periods at which that breaks up.

But overall, you would expect outperformance from value. But the catch is that it’s a bear market cycle. So outperformance doesn’t necessarily mean absolute gains. And so we’re pretty skeptical in terms of the momentum behind a lot of the value stocks out there, Berkshire included.

The momentum is really not very good from a long-term perspective still. And that would apply to most financial stocks as well. There’s always pockets of strength, but we just have to acknowledge that we’re fighting the prevailing trend in the broader market.

And with that influence, the odds will be against us in terms of really taking advantage of this relative performance. I mean, even the utility sector, which was a previous holding in the TACK ETF, that got kicked out because, even though it’s outperformed by a pretty strong degree, it has just seen a pretty significant loss of long-term upside momentum. And so we want to just be very careful to not just get caught in sort of a relative world, but also try to reward things that are showing positive momentum in absolute terms.

JARED BLIKRE: You really stick to your guns in all your answers– very impressive. Want to change it up, we got a couple of minutes left. I was looking in the background and it looks like I was seeing some pictures of a fishing trip– or I’m not sure exactly what that was. But just if you can tell us what’s on your wall– what’s hanging on your wall and how that might relate to your personal life, if you don’t mind.

KATIE STOCKTON: That’s funny. Well, I do love fishing. I have to say I’m a fly fisherwoman, or at least a wannabe one. It’s something that brings you out into nature, which I love, and being outdoors. And it’s also something that can get your mind off of the markets and other things.

You really get kind of absorbed in the moment with that. And there’s some joy, of course, of bringing a fish in. But also, we’ve done some sort of excursions, if you will, with some other sort of financial strategists, macro experts, and things like that over the time.

We’ve done a lot of getaways with other macro strategists. And it’s a great way to kind of bond in a different setting, where we’re not sitting in front of a Zoom camera like this or across a conference table. When you’re fishing with friends, it’s really kind of a more casual conversation.

JARED BLIKRE: Yeah, lots of metaphors to explore there– maybe in a future webinar. Really appreciate your time here. Katie Stockton, Founder and Managing Partner Fairlead Strategies, also the Portfolio Manager of the TACK ETF. Always great to talk with you.

Learned a lot. And looking forward to talking with you again here. And to everybody watching, thank you for joining us on another episode of « Yahoo Finance Uncut. »

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