[air whooshing] - You're watching "XS Returns" a channel that makes complex, investing ideas simple enough to actually use where better questions lead to better decisions. I'm Matt Ziggler, Justin Carmano's actually in charge here today. Don't let him tell you otherwise. We have one of our favorite technical analysts back with us, Fairlead Strategy Zone, Katie Stockton. What's good, Katie? - A lot, I think. So far, so good for the summer, thank you. I like the sound of that, especially post-4th of July. So, straight into the deep end. Last quarter, we talked about a continued long-term uptrend for the S&P. What do we all like that? Nice, easy, quiet summer. Hang it out by the-- - [laughs] Rarely ever, I know that that used to be sort of a guarantee, didn't it, but not so much anymore. - Don't people take vacations? What did COVID ruin this? So, you're seeing some shorter-term potential warning signs. Let's start here, let's get this chart up. What's going on? - Yeah, the shorter term, I mean, there's been a loss of momentum. We're maintaining right now a neutral bias. And the rationale behind that is simply the loss of momentum. You can see it in the moving averages, like the 20-day moving average for one. That's a very close, sort of type moving average. And normally, we might just ignore it. But when you have such a steep trend, and then it loses enough steam to have that 20-day roll over, we do pay attention, and it has been an environment where it has been just this really steep up move from the leadership, as you know. So that puts us on guard for any loss of momentum. The consolidation phase that initiated in June is neutral, it has a hold right now. And we're going to simply watch the boundaries of that consolidation pattern to determine, you know, whether we want to go more risk on or risk off. - So this is a place where I think the whole overbought and oversold part becomes really interesting in your work, because we achieved overbought. So actually, define those terms, and you're the way you define them first. And then let's talk about what we've moved through with that momentum loss. - Yeah, no, it's a good question, because I do think overbought and oversold are terms that are overused, right? They should reflect positive momentum. So overbought is a function of positive momentum. And when it makes a difference, when it has sort of the implications that the word suggests, and it's when you see the down-ticket momentum. So it is measurable, though, both overbought and oversold. We derive from the stochastic oscillator. So for us, it's either above 80% is overbought, below 20% is oversold. That's how we define it. It might mean different things to different people, but it is measurable. So when technicians who are professionals are talking about it, they usually are referring to an actual indicator as opposed to just something kind of feeling overbought or oversold. The better term on this would be overextended, right? One way or the other. So if somebody feels like something's overextended, that would be maybe a good way to label something. But the overbought condition, you'd be hard pressed to find that missing from a stock or a security that's breaking out, right? So it's a normal function of a breakout or positive momentum. But when you get that down-tick and the stochastic oscillator for us rolls back, below 80%, that's where you have a so-called overbought cell signal. And that's when you want to take action, right? In terms of risk management. So now let's talk about short-term versus long-term overbought and oversold, which, thank you for saying it. It's overused and it's one of those things that's used to the point of almost being meaningless so often. So the fact that you actually have some meaning here, talk me through short-term versus long-term in those signals. Half for us, I mean, really important to always have the multiple time frames in mind, because we're talking to people that some look out three to five years in their investing time horizon, whereas others are actually day-training. So we talked to everyone and they're in need to look at multiple time frames, but we find a lot of information from them and we start usually with a monthly bar chart and they're in a monthly stochastic oscillator to give us that long-term takeaway on that overbought oversold spectrum. And then we'll go down to the daily bar chart to get that shorter-term view. So a short-term overbought cell signal would have implications for days, maybe a couple weeks, whereas long-term one on the monthly chart would of course have implications for months if not longer. - I also think it's interesting to point out that that cell signal doesn't mean it has to go down to clear. You can clear that signal in a number of ways. You wanna just say this out loud, I think this gets overlooked too. - Yeah, so you don't need an oversold condition to, I guess, remedy the overbought condition. You can see an upturn and then indicator from neutral territory. We like this set of code stochastic pop, we call it where the stochastics will come down, but they hook right back up. It's like a whipsaw. And it's a positive whipsaw usually. So there are nuances to it for sure. There's a few indicators that do have by cell, by cell kind of behavior, but for the stochastic oscillator, it's not quite as clean as that maybe. And I would argue that that's the case for quite a few overbought oversold type inputs. We use the Denmark indicators as another one. They too don't toggle between by and cell, but rather suggest when the trend might be overextended in either direction. And that can happen multiple times on the bicider, the cell side. - Okay, let's jump to MACD because last quarter when we were talking about this, you were saying, here's a MACD cell signal, but we still need other factors for confirmation. So educational perspective first. Let's talk about what happened from then to now and what you saw because I don't think that confirmation ever came. - Well, so it depends on how you define the confirmation. And we like to see a couple of things for that, but to address that signal in particular, what we were looking at was the monthly MACD indicator for the S&P 500, which did confirm or actually log a cell signal or bearish crossover in March. So it happens right at the end of the month, the closing print determines whether that MACD crosses over or not. If you want to be more stringent, you might wait for confirmation on a second month, which did not happen because it whips on higher in April, which is really very unusual. In fact, I think it's happened maybe three times in 20 years. So really unusual and unexpected. And then another way you could look for confirmation would be something like one of those stochastic downturns below 80%. It's a matter of putting more weight of the evidence in your favor, right? And how much time do you want to give the market and its volatility before you say, okay, this is a real signal, but that March signal proved to be a pretty dramatic whipsaw just happening so quickly. I mean, I've seen them two, three months later, we'll have a higher reading or the reverse reading, but really very unusual, the very next month to receive that. So the loss of momentum still kind of shook the market in terms of the corrective phase. And it's resumed in a way that the momentum compares, I'd say less favorably than it did in say 2025, 2024. And you can see that in the MACD histogram, which is just a derivation of the MACD itself. So it's less strong momentum even that we saw the lift to new highs. So it doesn't minimize, of course, returns associated with that. But it tells us that it's probably a more immature uptrend for that reason. And that's why we just kind of further brace ourselves for any other confirmed cell signals that arise. - The whipsaw, let's just talk about the whipsaw for a second. This is part of why we want to use these indicators that help smooth stuff out, but it's also, whipsaw is mess with the indicators in a way too. How do you process that one? - I mean, I think it's a matter of waiting for those qualifiers, so with the longer term things, it might be hard to wait two months. But the good news is we have shorter term indicators to help sort of set the tone, right? So rather than maybe waiting two months to say, "Well, this is confirmed or not," you can refer to the shorter term timeframe like a weekly MACD, right? So the weekly MACD certainly flipped positives in a more timely fashion than we had from the monthly MACD, right? So I think it's a matter of zooming in on tighter time horizons when it comes to trading and positioning. When it comes to long-term investing, you would be well served by just waiting for that confirmation, just that additional confirmation, whether it's one additional length, so two months on a signal, which is kind of similar to what we do on breakout and breakdowns. We always wait for two closes on the time horizon and question above or below.
a certain level. So that double confirmation time and price is really very valuable and will help prevent web saws. You're always going to have web saws with anything. In the same way that you'll always have knee-jerk moves in response to earnings, right? So it's not a function that's limited to technical analysis, I would say. It certainly crosses disciplines. And it's just matter of putting the more probabilities in your favor by having more of these indicators on your side across the different time frames. So when we got bullish, again, on the back of that signal was when we had breakouts, when we started to see breakouts, from both the bottom of perspective and then ultimately from the S&P 500. So it's just a matter of that being adaptive to not saying, "Okay, well, the predictive value is not such that we can tell you where the S&P 500 will be at your end." And that rather to say that we have a prevailing uptrend, it's lost some steam. The sentiment is doing this. That creates a, you know, this kind of environment. So it's more about what's the current status and how do we want to be positioned within that context and how much attention are we paying to risk based on all the inputs that we have? Because no one knows where the market will be in six months. What are you seeing in the QQQs? I think, you know, it's, there's so much things obviously going on in the headlines with AI and SpaceX. And obviously the, the stocks in this index, the NASDAQ has been such a strong performer. I feel like every time, you know, investors feel like, "Okay, tech is done. It's going to roll over like another group in the tech market and tech sector sort of picks up the slack." But what do you see with the recent move in the QQQs? And I guess, you know, how is that in relation to the S&P 500, like what, what is the, the technical showing you? They really are almost like in greater focus, focus for our client base. They and the S&P 500 at times because I think, you know, most people are most interested in technology. And, and of course, the mega-caps is having been a source of upside leadership that's been pretty consistent. The QQ exposure is a bit greater to that than the SPYs, for example. So there's definitely a hyper focus on the QQs and reasonably so. And we have seen there too a loss of momentum pretty well aligned with what we have in the S&P 500, you know, there's 20 days rolling over. And that's something that, it reflects probably a chopper environment for even the summer months is what it would indicate based on history. And so that puts us in that mindset of, okay, we want to be adherent to stop losses or, you know, more, more mindful of cell signals things of that nature. So we have that, but we only have that short term indication right now. We don't have intermediate term cell signals for either benchmark. We don't have confirmed cell signals right now on the monthly charts of either benchmark, NASA 100 or S&P 500. So the messaging has been that this is a short term issue right now. There are signs of exhaustion that are longer term from the Denmark indicators, but they're unconfirmed. So kind of like lower conviction. The takeaway for us with that is just that was replying to more of like a neutral environment where we'll see some digestion, but not any kind of big dramatic bearish reversal is indicated by those gauges right now. So we have the short term loss of momentum. That's pretty obvious at this point, but it started a few weeks ago. And now we're watching the 50 day moving average and also just the recent highs is the boundaries of the consolidation phase for triple cues for SP wise as well. If we were to see the 50 day moving average taken out decisively, that naturally would be a setback. It is widely followed, but it's a great gauge of the intermediate term trend. So that's where we probably start to see some of those weekly indicators roll over in a meaningful way. We don't have that yet, but we're kind of mentally prepared for that. And you know, with the breach of the 50 day, I think things would get a little dicey here than they are now. But I think what's more interesting is your last point in regards to the relationship between the Nasdaq 100 tech heavy mega cap heavy to the S&P 500. And we've seen a bit of a chink in the armor of the outperformance from the triple cues versus the S&P 500. Again, short term, it's not an intermediate term reversal or anything of that nature, not yet at least. But we have definitely seen that kind of stalwart leadership from tech from SEMI's in particular and from mega caps shows in slippage. The mega caps have really started to underperform. SEMI conductors have just really over over the past couple of weeks started to lose their stronghold. And you're seeing that most in the triple cues and their relative strength ratio. So it's a bit of a risk, I would say, but not a decisive intermediate term reversal at this stage. So something that we're watching. And also, I think it has people thinking about, well, what happens when AI trade the confidence behind that. It suffers from something, right? You could argue that Korea is doing that right now. South Korea, you know, the news there, the pullback there is impacting sentiment around AI, and semiconductor sector. It's again, not that meaningful yet in terms of the intermediate term indicators, but it definitely has people thinking about, okay, well, what if this isn't here to bolster the market? And I think that's just a healthy way of thinking. Because I'm quite sure a lot of people are uncomfortably concentrated in these areas of the market. You may have already spoken to this, but that is I think one of the challenges for investors when you're in a stock or an index that has done so well and support is because I'm looking at the chart here, you know, on the QQ Q support is like below 650. This is a rough and it's above 700, but wherever it is now. So it's like, how do you tactically manage that when you have something that's done so well, you want to protect some of those profits? Is it using things like stop losses? Like, how do you sort of tactically address that, I guess, in the short run? Yeah, I so for sure stop losses. And I think that's one great takeaway from the charts is that you can identify the key levels where historically that ETF or product has held and use that as a stop loss because if that support or demand isn't there anymore, well, that's a breakdown of sorts, right? So that's a great way to manage risk. And then, you know, just simple trend following, right? By using the signals, perhaps in the MACD or from the curvature of the moving averages to say, okay, well, risk is heightened here of a pullback. Some people shouldn't do any repositioning through a pullback. And so it depends really on the overall financial picture, what's your time price and are you retired? You know, those type of questions come into play. But simply from a technical perspective stop losses and, you know, knowing when it makes sense maybe to hedge is her segment of your exposure. When we tell our clients it's a good time to be hedge, usually we're kind of addressing the higher beta segment of the market. And, you know, maybe take a small position and an inverse ETF like PSQ to hedge the risk that they carry through that pullback or just to limit the drawdown. And if they can think about it that way without having to get the taxable implications of selling their positions that they still love from a fundamental perspective, but also perhaps feel like things are a little overdone. And so I think that it's either through ETFs that they can achieve that hedge, usually just a partial hedge or through a stop loss or trend following discipline that really needs to be systematic. And that's something I think we all, sort of, you know, don't do as much as we should do, which is to rely on these tools because they are almost like reporting what's going on in the market. And as much as we let our biases get in the way and the market doesn't really lie. So I think it's a matter of really respecting the tools and to do so regularly. That's where I think you get the most benefit from using the charts and technical analysis. And, you know, we're all even, even I've said fairly, it's our day job here, and personally, and investing, it's still very difficult to respect all of the breakdowns and the cell signals that we see because, you know, you just kind of let those biases get into your decision-making. You have a chart in here on the Mag 7, and you had also versus the S&P 500, like in the lower part, but just I want you to speak to it. But are you surprised that the market has kind of hung in here, given some of the underperformance in the Mag 7? Like I remember, like, you know, listening to commentators saying, you know, if the Mag 7 falls apart, the market's done, the market's still concentrated. And yeah, you know, these other areas of the market have sort of picked up the slack. And that's
It's kind of been the case for a lot of the time when the max seven has kind of gone through these rough periods. So when are your thoughts around that? Yeah, and if for sure, I mean, it has surprised me because when you look at the ratio of the max seven to the S and P, it almost looks like an eerie, like head and shoulders top. It's really quite bearish the way it sets up. And whereas in absolute terms, it looks kind of like more of a general know or general mills, right, general run of the mill correction. And that is something that usually we would see as an opportunity. And so we had to reconcile, I think, the sort of set up in absolute and relative terms for one, and that the pullback, by the way, did follow a pretty substantial rally. And so it's only a partial retracement in absolute terms. So it really doesn't look like any kind of breakdown. And yet, you're right. I mean, it's just been remarkable how strong or resilient the market has been in light of this underperformance. And it's been wholly related to the AI trade as it pertains to the semiconductor sector in particular. So it's really a very sort of narrow story this time around. It's not to say it hasn't happened before with different sectors. We'd be like financial stepping in. But this has been more about the semis versus the mega caps. So that becomes more important almost towards market sentiment than the mega caps as before. So and I think though that where we're seeing that impact to a degree is in the momentum strengths behind those long term momentum indicators. So the MACD histogram, on the monthly chart of the S&P, it compares unfavorably. And I think that's probably part and personal with this. But that doesn't mean you're necessarily losing money, right? On the, if you have broad basic exposure, the catch is that a lot of people do have that heavy mega cap exposure. And they might be what they feel like is with an underweight position in the DRAM stocks or something like this. So you've got, I think, a little bit of a performance chase in that world. So it is, I think it's remarkable. I think it's really interesting. And by the time we kind of figure it out and get our heads around it, it probably will change. So I wouldn't, I wouldn't suspect that this is going to be the last scene set up necessarily. The market breath is obviously a huge piece of the puzzle. And leadership and breadth are two really different things. I might have said this on this podcast before, but market breath is participation. So how many stocks are up in up days? Whereas market leadership is, where is that our performance coming from? So those are two really different things. So we've had especially narrow leadership to the semis in this environment. But the breath has been pretty decent, actually. So that participation has been pretty good. Just doesn't mean that we're getting that strong out for performance outside of it. At least up until very recently. Does does that market breath indicator? Does that take in, because I mean, lately small caps and maybe some value stuff has been holding up a little bit better? Like how does like those types of areas of the market? And does it impact breath less because they're smaller? Or is that not really the case? It's just overall advanced decline counts. Yeah, so there's so many ways you can measure it. Honestly, we use it and why I see cumulative advanced decline, nine typically for our running measure of it. And then we'll also use things like percentage of stocks above their 50 day moving averages, which would be more of an oscillating measure. And we found that the cumulative measure is not like the best market timing device, but it gives you a sense of a backdrop rate. It tells you that most stocks are still rising. Like you don't have some big negative divergence. New highs in market breath are not necessarily an action point for the market, but they do affirm what's already happened for the major indices, right? So it's just confirmation as opposed to a breakout that you could really feel like it's actionable. And necessarily it's like you'd rather see that, of course, than lower highs. It also means that it's been an easier market environment than others. When others will have weak breath, it just means your stock selection becomes so much more important. So while I'd say a lot of people have probably underperform the S&P 500 in this environment, it doesn't mean they're unhappy with their portfolios because they're probably doing all right. The vast majority of stocks are still going up with the market, even if that person might feel like they're underexposed to that leadership segment, their portfolio is still working for them. So it's an interesting thing to pick apart, but there's nothing worrisome right now in market breath. And I think how it's translating on the sector front right now is really very interesting. Well, let's talk about that for a second. Because I think bread does a term is really useful in the framing context of anybody trying to be active. If you're trying to be active, bread is a great overlay. What are you seeing at the sector level? Yeah. And so like breath also applies to sectors, but so does leadership, right? So when we talk about sector rotation, we're talking about typically where's the relative performance coming from. And that has really shifted recently and it's almost 100% of function as the technology sector and also triple cues. It's a little bit of a down tick in that relative performance because they have such a huge footprint, both in number of stocks within the market and also their market cap footprint. They, when they start to underperform, it means that the relative performance looks so much better for almost every other area, right? So it's kind of an interesting thing that relative strength will can improve for just about everything else when it has been a narrow tech led environment. And that's indeed what we're happening. And even the relative strength for the consumer staple sector, which is not a great performer of late, has upticked just as a function of the down tick and tech. But now what we've seen with the ones that have performed and have done so more meaningfully than consumer staples were getting breakouts. So we even just today highlighted a breakout for one in the healthcare sector. So we've been sort of anticipating this with the relative improvement over time. And indeed, there's been a lot of resistance levels cleared by the benchmarks for healthcare biotech and some other segments too. So we're really very respectful of breakouts when they happen because that's the breath. And then we're of course always chasing relative strength as well. So now we have good brass, relative strength has shifted enough that some sectors, industrials would be another one that's happened more recently, have emerged and are a source of breakouts. And we love breakouts. We always want to have that exposure. And place where less so a break out right now when I know it oscillates, but I want to talk about sentiment because sentiment seems like it's showing how a lot of us are feeling right now when I look at this chart. Even though those stocks are towards their highs, sentiments telling a different story on that. Yeah, no, it often does. Doesn't it? And you know, it's funny because we all know how sentiment is from our conversations and from how we feel, but what's great is we have these measurable sentiment gauges. The very popular one is the VIX, the CBOE volatility index. And we use that as a transactional gauge. It's looking at basically how hedged mostly institutions are. And that can be real money or representing real money. So things like that can be so informational. And we also use the fear and greed index, which is like an aggregated sentiment transaction gauge in a way. So that will tell us what not only the VIX is sort of same, but the VIX alongside other things like junk bond demand are saying. And right now it is pretty oversold to go ahead and use that word. But not to the point where we have that turnaround to suggest that it's done. But we find is that this is another oscillating measure. And when you have a sub 25% reading, that's the so called oversold reading. But it'll often dip to deeper level. And it's that pivot point. And when it comes back above, you know, 20, 25%, that's where we like to pay attention. So we're not convinced that we have that decisive turnaround yet. And there's always noise. But certainly sentiment is from that measure, getting to sort of an extreme or has gone to an extreme bearish level that we start paying attention to because those.
bearish sentiment readings are usually the stuff of meter lows. And it catches they can get much more bearish before they turn. Right. So you want to be not too, too quick to respect the bear sentiment reading and make sure that you have those indicators on your side as well that are measuring the trend. So at a very minimum, we tell people to make sure that a bearish sentiment reading gives a way to improve short term momentum that can be watching a daily Mac D's. If you're a real short term, it could be watching the 20 day movie now average for an app turns. You want to make sure that that momentum also confirms what's happening. Sentiment regarding where we started the conversation, too, because we had sentiment that was on the side of greed without being fully across that line. And now we've gone into this consolidation. And I think it helps tell the story of why the consolidation feels so nauseating without crazy lows. But I'm curious, did this line up in this cycle at all for you just in this consolidation phase? Since last we spoke, that's funny because we didn't have an overbought reading and not not for nine months. So I think that was a little bit surprising. What we find is that in, you know, very strong tapes, you'd expect to have more overbought sales signals in the market internals, but they're of course like far fewer and farther between then the oversold readings, which do generate much greater extremes. The way we measure that is through analysis of not just one sentiment gauge, but multiple. So we look for extremes in like several measures before getting excited. So we don't just look at the fear and greed and say that's our primary gauge. They also refer to other gauges. And what we found is that we had, I think it was only two out of the say dozen or so indicators that we track for market internals, hit an overbought extreme, which honestly isn't really that extreme. So if you're using that as your primary input, which, which we are more adherent to momentum gauges, but if you're simply watching for those extremes, we didn't have a super extreme environment in terms of people getting overly bullish, right? Nor do we have it, especially extreme environment on the other side yet. So, so yeah, we haven't had a lot of huge extremes since last year's major low after the Q1 corrective phase. That was the last giant like oversold collection of readings that we received. So I pay most attention when you have the collection of extremes that are impacting, let's say, three or more as a rule. And we just really haven't had that yet. So kind of interesting. I think it's really interesting because it's this idea that there's points in time when multiple indicators line up. And right now where we are, nothing's really lined up in a way that gives a strong sense of a new trends emerging, a bottoms in or we're about to lower. We're sort of in this weird cloud right now. Well, yeah, it's like almost like the void, right? But it's where the market is most of the time. So when it comes to the market, internals, there's the extremes are that way for a reason, right? You might see a collection of extremes like two to three times a year. I'd say on average. And this year is below average and in logging those types of extremes. So you have on and off years. And so it is really interesting. But we pay most attention when we get those big extreme readings. And I'm quite sure we will get them between now and your end at some point. But, but yeah, is it imminent? We can't say for sure, obviously. And I would say we feel more conviction that it's with this kind of corrective fees. If we were to see greater deterioration in our weekly indicators. I want to go back to sectors. I want to sort of go through them one at a time if we can because the difference of 2025 to 2026 thus far. There's been some wild swings between sectors, between that rotation from leadership, the energy numbers alone. Yeah. I mean, that's, that's a tiny part of the index. It's a big number on a performance basis. How should we be making sense of this digestion that 2026 has brought us? Yeah. I mean, I would just say that with the digestion fees, like in terms of sector rotation, like you, again, you have to kind of go back to reconciling the breath and the leadership in the market. So I feel like that, you know, the breath has been good and asked that we have in our own ETF that the fairly tactical sector ETF recently maintained. And nearly 100% exposure to the equity sectors, the market. So there's enough working that that warrants that kind of even in an equal weight strategy, like tax, holding eight sectors at the market. And so that kind of for us would sort of like we consider to be a more full equity exposure. That's a function of the breath of the market. The narrow leadership has been the bigger challenge and where we got the first correction this year and were probably get the second correction this year. Is when the sentiment shifts more meaningfully around the leadership segments of the market and we have some. Perhaps early indications of that, but not not again to the extent that we feel like it's it's high conviction. And the sectors if we were to pick them apart sort of one by one. Again, most are in uptrends. Most are not in, you know, strong, steep uptrends like we've seen from the technology sector. But now we have some of those breakouts, you know, like the industrials and healthcare. And the beleaguered areas of the market, which previously was, you know, financials or reads or consumer staples, even discretionary. So those areas of the market in absolute terms, they don't look too bad. Honestly, you know that the longer term trends are pretty much intact. If you had checked up on them a year ago, you probably have sort of a similar takeaway as a year ago. We're not seeing a breakdowns, not not a lot of breakdowns unless they're more short term at times, right. We saw certainly a lot of not necessarily breakdowns long term, but overbought downturns after the correction. You know, culminated in March. So that gives you a little bit of that kind of, you know, it shakes your confidence a little bit. But it for our ETS, it's like we, we only, you know, went down to like an 87 and a half person position in the equity market. And then came right back to the full exposure. So it wasn't really enough to impact the long term momentum or long term uptrends. That are still really very widespread on the sector front. Right now, I last looked at the utility sector, especially electric utilities and boy, I mean, they're acting really well, right. Not necessarily a super promising source of relative outperformance. But but you can definitely make a case for them. You know, short term and also long term based on their action. And so there's a lot to do out there, you know, the bottom up work shows a lot of diversity in the charts, which is another cool takeaway, I think, from the current environment. And it is largely related to the sectors. Energy as another sector has seen like a pretty substantial down draft. As you imagine with the price of crude oil. But now we have some oversold indications that are getting kind of interesting, some signs of dance and exhaustion from the Denmark indicators. So we pay attention when that happens and look for opportunities that become a little higher conviction. So so even in areas that have done really poorly, we can make the case, perhaps for either counter to an exposure or taking advantage of their corrective thesis. So pretty unique environment in that way that despite that neural leadership, there's still been a lot to do. If you have sort of a broad exposure that you're seeking and your portfolio, just, you know, if you're a generalist. Of which, you know, sometimes I feel like the only questions I get are about technology, but it is, I think, positive to have kind of a generalist outlook when it comes to the sectors and for your core holdings, especially if you're most interested in technology can create some ballast to a portfolio in a way, you know, if you have other sectors to, you know, that might be less correlated to the SMP 500. Which gets extra interesting and thanks for bringing it up like the utilities performance, the reversal and reads after all the B read drama and things that we saw in the middle of last year. There's a lot of other moving sectors right now. And even if it's not showing up in headline ways, at least we can talk about something other than tech. Yeah, I know it's we actually featured in an article recently, they insures so the insurance sector, which we're not getting a lot of questions about it, but boy, it started acting really well. And you started to see some breakouts. So it is a more.
market that I would say is rewarding the breakout. So when we see a breakout, we're inclined to believe it. And it's almost counterintuitive, I think, to some time you feel like you're chasing some of these rallies. But the follow-through has generally been really very good. And so, you know, when a stock clears, it's 200 day moving average. That type of thing we're generally seeing good follow-through. So with breakouts and some of these other sectors or subgroups, it's been great. I mean, Fiatek as another example within healthcare. That broke out a few weeks ago, and it's still going. So you can get a little bit more, I guess, momentum out of the breakouts, which by the nature, they're relieving the chart of their resistance, right? So the supply that was there isn't there anymore. And that's a positive take away. Kedian, you know, we've talked to you a number of times, and we always like to spend some time on the methodology behind tech. And you kind of hit on it to some extent. But I think it'd be good to sort of hear from you, you know, how the ETF has managed both in these risk-on and risk-off environments. And I was just looking at the on the on the on the fund website, you know, you guys benchmarked to the Russell 1000 equal weighted. And you know, when you look at like the risk statistics, things like standard deviation, you know, worst quarter, I mean, max drawdowns not on there, but you know, I'm sure it's way it's a it's like not only has the fund kept close to a long-only strategy, but in periods of stress, you know, the strategy actually has has delivered. So just kind of talk to that. Because I think we kind of sometimes lose sight of that as investors, like the importance of the downside management too. Yeah, and I appreciate that just and and I agree with you. I'm going to think it kind of going back to that comment about ballast, right, to a portfolio that's tech heavy. I think tech is is a great sort of strategy to that and into it. And I say that because not only of that equal lead exposure, which kind of inherently provides that ballast, right, but then also the long-term trend following that's informing it. So at its core, tech is like a sector rotation strategy. It evaluates all the sectors using sector spider ETFs. And it looks for the best sort of long-term trend falling inputs. And if all 11 economic sectors are checking boxes, well, we narrow those to eight. And we do that using the quantitative overlay. And if there's only eight, we'll hold all of eight. And that's where we stand currently. And if there's less than eight, well, then that becomes an environment in which we will use other asset classes. So we will shift the bucket that was sort of dedicated to the sector. And that's now not showing those long-term bullish characteristics. And we give that bucket to a combination of ETFs representing treasuries. So both short-term and long-term treasuries and gold. So using the gold mini shares. So it's a really pretty unique strategy in that it has that that trend following element. It uses asset allocation. But then at its core is sort of an equal weight sector strategy that the end result, I think, is most, I guess relevant when we have our conversations with investors. Because we want them to think in terms of what's our desired outcome. And I know that's become like a phrase in the world of ETFs. But we want to make sure that we are limiting drawdowns consistently through this strategy. And that's just as important to us. Because we believe that especially as you're either on the verge of retirement, in retirement, or unfortunately perhaps investing at the start of a bear cycle, which will and does happen, that you have some protection, some downside protection, and not through some sophisticated option strategy. But through that asset allocation and through also the trend following, which inherently kind of manages risk in and of itself. So that's the tax strategy. I think the low beta profile is something that is desirable, the low correlation to the S&P 500 and even though relative correlation to that benchmark, which has no asset allocation, of course, right? We're comparing it to an equal weight index. That suffers, you know, bigger drawdowns and has more volatility, right? So it's almost like the more accurate comparison could be something that's like a 6040 type of portfolio, right? But then you have that extra gold element to it. And it doesn't actually over history tend to run 6040 exactly. Obviously fluctuates. It can actually go all the way to full exposure in assets outside of equities. So as much as it's an equity focused fund, it can at times hold no equities. That's great. Thank you. Yeah. I think it's a very interesting strategy to be tucked in, you know, inside investors portfolio, particularly someone that is worried about drawdowns or maybe more specifically for, you know, people that tend to behave badly when market drawdowns happen. And a lot of investors do that. Yeah. We all do. And systematic, I think, is you know, an important takeaway as well where it's responding to market moves as opposed to, you know, our discretion, we're not waking up and saying, you know, what should this look like this month? It's really relating to indicators guide our positioning, which I think is something that's again, that risk management is inherent to being more systematic in an approach. And so, yeah, it is, it is pretty unique. Another area I think that investors are, or were, and probably still are under exposed to is, you know, international socks, both developed and emerging markets. So talk to us about what the charts are telling you about international and those two areas of international versus the US. I mean, it's been, I think a pretty good run since the beginning of '05 for both sort of cohorts of these non-US stocks. But what are the charts saying here? Well, it's been pretty interesting because emerging markets have this element of the technology sector dominating the performance of the benchmark. So we have this South Korean market, as mentioned, had a very strong run up now, quite a strong pullback. But that's largely related to, it just only's like a very small segment of that market, but a very dominant and powerful one in the semiconductor sector. So the emerging market proxies have been pretty, I guess, influenced by that. Also, I mean, we always would talk about how China dominates these emerging market proxies. Like, but why China has really done poorly, heavily, and you wouldn't really see that in those EEM proxies. And that's exactly how strong Taiwan and these other regions in Asia have done well and contributed to that relative performance. So it's a really interesting kind of case study, but it's almost like you want to maybe focus more on the country level than from a top-down perspective. But the relative trend is favorable, longer term and emerging markets to US. And that's something that we sort of started to see in Cleansef a few months ago. And it's persisted. You can see it in the curvature of the moving averages of the ratio and the action, the trend following. And then for EFA countries, developed global versus US, we've seen a pullback. I think you tuned into the fact that the timing of that came on the back of when the war initiated. And then when also we saw that really strong recovery in the US, I think when the US is working, it certainly is the dominant sort of player, I think, in global investment markets. So that underperformance from the EFA countries, I think it sort of, you could almost translate it as if we're talking about semis versus our market as like the US is representing semis, right? So I think that the underperformance is wholly a function of the lesser technology exposure in these other countries. And that when we see more sort of value rotation, which we're starting to see some hints as that that's when the European countries tend to benefit from that in relative terms. So it really is, it's based on a sector positioning and the actual price action and absolute terms in the US is really very influential on those ratios. But I would say the takeaway, honestly, in the ratio itself is sort of neutral because following this pullback associated with, you know, the conflict and the rebound have you, you know, the range is still holding. So the pullback has brought the ratio into some range support. And even still the long term shifts still seems to be intact, right? So even though there's a range now, it's a it's a better picture than it was two years ago for international markets versus US. So it just opens up more doors, I think, to invest in countries where you have a compelling case to do so, either from a macro or a fundamental perspective. Commodities are a huge influence on the country level, as you know, as well. So, you know, if you're constructive on certain metals or and certain
and energy commodities, well that might lead you to different markets. But overall, I would say in line to better performances is likely to characterize this year and that opens up more Doris for us. It's fascinating how markets have digested this conflict and this event and how little we see it sort of in that chart itself when we look at it. Yeah, it is. It is. And I think it's, you know, it's all about sentiment. And so somehow we've managed through this environment without losing the sentiment that has boosted the market. And I'm not talking about the fear and greed index type of sentiment, but the demand, right? And that demand, I think, has has been fueled by the AI trade. And, you know, it might be different next time. But I think that that sort of excitement has been exactly why we've been able to navigate this challenging environment. But I do think that the shock in crude oil prices is something that remains a risk, even though we've seen a big retracement. And I do think that credit spreads, you know, looking somewhat oversold technical perspective are also a risk. So these are things that we'll watch and we'll keep us, you know, our guards up to some degree, and I just given exactly what you cite their matters in terms of its surprising to see such a resilient tape in the face of some of the geopolitical risks. Another one that's a surprise. And so far, best explanation I've seen of this came from Ben Hunt, who shared it on our monthly show, where he basically said, trust in the US central bank seems to be recovering from a low from when the president was beating up on Powell last year. And that seems to have been writing itself. And maybe that's the explanation for where I want to go next, which is the price of gold. This is another one that, well, we've come off the top a little bit. What's going on with gold? It's been an corrective phase that now should sense it down to exhaustion. But what we saw last quarter and what remains an issue is a loss of long term upside momentum. That's meaningful enough to hit our monthly indicators. So I think we're now in the mindset of, okay, well, gold, you know, more short, intermediate terms, things are what we're going to try to navigate as opposed to that nice, strong bull market that we had previously. Katie, people want to find you on the internet bug you get some of this research. Where can we send them? Of course. So we have a website, FairleadStrategy.com. And we encourage people to take a trial of our research. We offer free one month trials. They can also find me on LinkedIn and on X. It's at Stockton Katie. And yeah, we also had the Fairlead Funds website, which is all about tech. So encourage people to reach out. Make sure you check it out. Make sure you head over to excess returns on substack. We'll have notes, transcripts, all sorts of things on this episode and more. Katie, thanks so much for doing this. Thank you guys. Nice to see you. Like, comment, subscribe, all the things below. And we are out. Thank you for tuning into this episode. Thank 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 at excess returns. Pod.com. If you have any feedback or questions, you can contact us at excess returns
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