Lead-Lag Live

Katie Stockton on Market Volatility, Sector Shifts, and Technical Analysis for Active Management

• Michael A. Gayed, CFA

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What if you could navigate market volatility like a pro? Join us as we sit down with Katie Stockton, a Chartered Market Technician from Fairlead Strategies, who shares her expert insights on the recent spike in market volatility and its profound implications. Katie walks us through the transition from long-term bullish trends to a more cautious neutral stance, and what it means for future market pullbacks and opportunities. Learn about the pivotal shift in market leadership from high beta growth stocks to more stable value stocks, and how this balance is playing out between large caps and small/mid-caps.

Sector dynamics are also under the spotlight as Katie highlights the potential revival in the energy and materials sectors. Hear about the promising signals from energy ETFs like XLE, OIH, and XOP, and the recovery prospects for base metals, especially copper. We also explore gold's unique bullish setup in the current commodity cycle and compare the defensive roles of healthcare and utilities sectors in today's market. Katie's breakdown offers a comprehensive view of sector shifts and how investors can position themselves to take advantage of these trends.

Active management in volatile markets is a focal point as Katie explains how active managers can outperform through effective risk management and drawdown mitigation. Discover the significant role of technical analysis in identifying market trends and managing risk, particularly when fundamental factors take a backseat. Gain insights into the shifting dynamics of small cap and large cap benchmarks, the influence of the dollar's strength on market sectors, and the incorporation of international equity markets. This episode is packed with valuable advice and strategies, making it essential listening for any investor looking to navigate these turbulent times with confidence.

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Speaker 1:

My name is Michael Guyatt, publisher of the Lead Layer. Poor Dreaming of the Rough Hours. Katie Stockton of Fairleaf Strategies. Katie, in terms of the audience, who are you? What's your background, what have you done throughout your career and what are you doing currently?

Speaker 2:

Well, I see, michael, on your title. There you don't have CMT listed, but I think both of us should. Cmts are chartered market technicians, and that's what I am, so it's essentially a sort of like the equivalent of a CFA, but for technical analysts, and it's our primary discipline. It's all we do at Fairlead Strategies. We publish technical research covering all markets, primarily focused, however, on US equities, so we're an independent research provider. We also provide consulting services to individuals, institutions, and we do this every day, all day.

Speaker 2:

We're really really deep in the markets and in touch with things, so we pride ourselves on very quick response times. Just like you, I know you're very sort of dynamic in how you approach markets. So we also have an ETF. We launched an ETF called the Fairly Tactical Sector ETF in 2022. And that was a really nice sort of offering for our existing client base, something that allows you to sort of invest alongside us from a long-term technical perspective. So we have a lot going on. We're based in Connecticut and I'm broadcasting right now from my home office, but we have a great space in Connecticut and a great team, so I'm really glad to be joined in part by my sister, who's our COO, and a lot of upside for Fairlead.

Speaker 1:

All right. So let's go through just the last week and a half from a technical perspective, because if you blinked your eyes you may not have realized that it looked like the world was ending for a couple of days there, Friday into Monday, From a technical lens. Was what happened too quick to really make any changes, to even see coming?

Speaker 2:

You know the damage was actually sort of manifesting itself in the equity market even before we got that volatility spike.

Speaker 2:

So we had picked up on a loss of intermediate term momentum that was sort of significant on the charts and you know we were mindful of that going into the volatility spike or event.

Speaker 2:

Now we have been also anticipating increased volatility in sort of a long-term movement from a low vol cycle to a high vol cycle. And boy, that happened in very abrupt fashion. Usually when you get these big VIX spikes, if you look over history the implications are actually pretty neutral neutral for like a choppier equity market for even a few months. So that actually contributed to our movement from a long-term bullish bias to now long-term neutral bias. The timeframe for that is maybe four to six months. So it's not on the long-term end of long-term for us, but it does suggest a look at a choppier environment in here and that's associated also with that deterioration that we identified even before the volatility spike. Near term it's a different picture. We really have to be focused and clear on the timeframes that we're referencing in our research, because short term we think they're still upside and we've been calling for this relief rally or oversold bounce is probably an opportunity to reduce exposure ahead of what we think will be a seasonal correction into September.

Speaker 1:

Sounds like the main event which I keep saying on X I think is going, which is a basic credit spread, widening aggressively. Occasionally I'll joke, I'll say VIX going to zero. Bro, right, to kind of play with the way some of these younger being contributors talk about things. We had this VIX spike. It looks like maybe a false print on the 65 level pre-market. Typically, when you have these VIX spikes that are that aggressive, do you tend to see another VIX spike that maybe is half as aggressive, kind of like a ball bouncing where the amplitude is less shortly thereafter, or is that pretty much it?

Speaker 2:

I guess we could probably call that an aftershock, right, and I do think they ultimately happen. I think what we have implications of with the movement from the low volatility cycle into the high volatility cycle is essentially just a more corrective market, one that is dotted by more pullbacks, and with that we are likely to see more VIX, I'd say spikes, not necessarily spikes to 65, because that's highly unusual but as sort of those types of aftershocks. So we are expecting more of the same, and it can be both good and bad. Right, I mean it can be hard to navigate. You know you can't maybe assert a long-term directional bias and benefit from that in the same way that you did before. But it does provide opportunity. When you have increased volatility you can add exposure into weakness and try to ride these relief rallies. You just generally have to tighten your time frame a little bit.

Speaker 2:

And we've seen, I guess a hand in hand with that increase in volatility, a very distinct shift in leadership, and the media is calling it the big rotation.

Speaker 2:

I think that's actually pretty accurate when we have the mega cap stocks having not really I mean, they've corrected right, but they've lost enough relative strength with that correction to suggest it is pretty meaningful. And with their loss of relative strength we've seen other areas of the market garner relative strength, and that would be lower beta stocks. We've seen sort of value over growth manifest itself in the relative ratios sort of turning the corner. We've also seen equal weight do better than large caps. So when you've seen that and I think it is pretty meaningful as well it doesn't mean that we'll get long-term outperformance by small and mid, necessarily, but it does mean that we've entered an environment that's probably a bit more balanced in that relative performance, where the large caps are more aligned or in line with the performance of the small and mid, and with that again you can source that as an opportunity. Right, it's not necessarily going to be an easy tape, but maybe there's more stocks to choose from with that shift in leadership.

Speaker 1:

I think it's interesting because it looks like a lot of that happened entering July, right? So I look at these relative ratios similar to you value relative to growth bottom entering July. Small relative to large bottom entering July. That's also, in the end, bottom as well. Typically do major secular rotational shifts happen in volatility regimes? I mean kind of quietly beneath the surface as everyone's looking at headline averages.

Speaker 2:

Well, I mean, if you look at the last high volatility cycle, it was 2022, which, of course, was a bear market cycle. I would call it a cycle, not a secular shift. In 2022, we still had, if you look at our long term charts, which are, for us, the monthly bar charts, and we have something called the cloud model I'm sure you've heard of it, or Ich Ichimoku is its more official name that model still supports the major indices. It supported it in 2022, supports it going through 2026. So we still have what we think is a secular bull market in place and intact, and yet we can see these sort of corrective periods within that context.

Speaker 2:

In fact, we feel like we're seeing the same type of thing in treasury yields.

Speaker 2:

So, if you look at 10-year treasury yields, they have a loss of long-term upside momentum. That's meaningful, and yet we think it's within the context of a secular uptrend that we're expecting more sort of sideways to lower from yield. So same type of action we're expecting from US equities, especially on the large cap front, as they basically digest their gains from going back to October of 23, when we had a nice intermediate term low and, of course, a subsequent bull market cycle that really was driven by that mega cap leadership. So I think it's not necessarily a secular shift. Where that would start to look like it's maybe happening is when we would get maybe some negative divergences in those long-term metrics, which we do not have as of yet, where perhaps we see a key support level jeopardized, which we also do not have happened, at least for the major indices that we're tracking yet. So you know, there are definitely some things that would give us some cues. I think that we're starting to see something more than just a corrective phase.

Speaker 1:

Let's go through some sector analysis, and it's kind of funny because I'll show a post that you put out July 30th, before all this started taking place. Looking at the energy sector, oih, let's talk through where some new leadership is emerging right. I happen to like the energy sector quite a bit on a relative basis. I'm myself negative short term on markets, but there's going to be plenty of opportunities in the laggards. Let's go through them one by one. How do you think about energy here?

Speaker 2:

Yeah, so we even wrote it up again in our morning note today because we want to revisit it. The OIH was a bit early, let's put it that way, but with the shakeout that we have as of basically last week, that pullback that gave way to these exhaustion gaps and is now giving way to a nice little relief rally, it looks like a shakeout on the chart, especially for energy, because energy, just in general, if you look at any of the ETFs you know XLE, oih, xop all of them have pretty good support levels that are not terribly far from current levels. All of them have pretty good support levels that are not terribly far from current levels and they were a bit more oversold, looking at things like the weekly stochastics, than the broader equity market, because the energy sector had been a source of underperformance. So I feel like the energy sector has a bit of a turn here for relative performance to improve and of course that would be part and parcel with more relative well bigger relief rallies, I should say, in both crude oil and also natural gas prices. We finally have a bounce underway in gas and crude oil prices.

Speaker 2:

Seem like they're bent on running up to the upper boundary of the triangle, sort of a similar triangle that you see there on the OIH chart. So we think there's some promise there. It's really, you know, definitely feel confident in relative terms and absolute terms. You know that the energy sector isn't going to be on a necessarily if the S&P 500 is in correction mode in a few weeks. So we do have that sort of top down influence that we have to contend with, even with the segment of the market that we feel should do a lot better. But we are increasingly interested in it from a relative perspective and we think it's kind of interesting as well because it doesn't have the same level of correlation, of course, as some other sectors do to those major indices. So if we do get into a deeper corrective phase, well then energy might stand out as just having a different setup, which is sort of welcome from a diversification standpoint.

Speaker 1:

Does that throw off the long duration treasury argument at all? I mean, typically if oil is rising, energy is doing well, that's cost push inflationary pressure. That should hurt bonds.

Speaker 2:

Well, when we think about that, I mean it's still neutral right now as it stands right. So that could of course change with a breakout from a triangle formation. The breakouts from triangles tend to be pretty high probability. You'll see this immediate upside follow through. So if we were to get that then you're right, it might affect sort of the macro picture, but where it stands right now it doesn't seem to be impacting it and our bias on yields is really more, I'd say, neutral to lower, not sharply lower, because it's still within the context of that secular shift and uptrend there. So not yet, but it certainly couldn't do that.

Speaker 1:

Of course, the cousin to energy is materials, which have had some interesting relative movement as of late. What about the materials Now? The materials sector is? I always think it's funny because a lot of the materials sector funds are very heavy just chemicals, not the traditional commodities that you think of in terms of metals and mining Bo. Any thoughts there?

Speaker 2:

Bo. Any thoughts there? Yeah, you know, with the materials I feel like they move more aligned with industrials in terms of their relative performance. So we've definitely noticed that in our ratios. And yet part of the components of that sort of material sector would be base metals, like you know, companies that are oriented or involved in base metals. Companies that are oriented or involved in base metals and we also, in our morning notes kind of on this commodity balance, here featured copper and copper prices have the potential for recovery after about a 25% corrective phase. And you know we feel that that recovery, you know it, should benefit the likes of, you know, freeport Macaron. You know some of these sort of materials companies that would be included in a broader material sector benchmark. So we could see that relative performance improve, alongside energy, because of that kind of commodity cycle that we think is underway.

Speaker 1:

If that commodity cycle is underway, which I don't necessarily disagree, it sounds like gold will benefit obviously from that and there's been a lot of focus on the all-time highs and possibly kind of real breakout. That's there. But gold also somewhat acts a little bit different than other commodities. It's not as industrial, as you know. Should we be thinking about gold as being separate from commodities from a momentum divergence perspective, or would you view them as co-moving?

Speaker 2:

You know that's a great way to frame it.

Speaker 2:

Gold prices have been a little bit of their own beasts, I feel like, lately within the broader commodity complex.

Speaker 2:

So you might be onto something there and I know you've done a lot of work in this kind of realm which we have not done the same level of work. But I feel like the gold setup is bullish, but really kind of for different reasons. Right, we feel like we have what was a major, major channel breakout from gold and with that we've seen some positive follow through. So with any breakout we want to see that immediate upside follow through because that enhances the breakouts and sort of I guess it just confirms it in a way. And so we've seen upside follow through. The momentum is still to the upside. Longer term it should probably peter off a little bit where the uptrend takes on a little bit more of a gradual slope, I would guess. But I think that we'll see this kind of commodity bull cycle affect gold and also some of these energy commodities, natgas. I'm a little less convinced that it's a lasting move, but I think that's healthy skepticism based on how it trades.

Speaker 1:

So a lot of people have been focusing on the utility sector, quite a bit right. Tends to be not just defensive sector but also signal, as documented. I'm actually more intrigued by the healthcare sector here, because that tends to be among the defensive plays.

Speaker 2:

Yeah.

Speaker 1:

It has some weird dynamics in this most recent cycle because of the GLP-1 momentum trade. Right that's made it more of an offensive side, I think, at least selectively. How do you think through healthcare here? It seems like there's a lot of bifurcation. A lot of biotech stocks haven't done all that much. They're not really defensive. But if small caps run biotechs or small caps they should have a chance. It seems like there's a lot of cross currents.

Speaker 2:

Yeah. So the healthcare spider ETF XLV. We do own that in our tech ETF TACK and you know we're comfortable with it as being a bit more defensive. Leading exposure as a sector right Of course biotech is, and this past week was in regards to the healthcare sector, and our rotational work, which we use relative rotation graphs for, suggested that biotech stocks and healthcare providers were among the best positioned within the broader healthcare complex. I thought that was pretty interesting because they're quite different, as you know, and maybe it is a testament to that rotation that we've seen that has benefited the relative performance of small and mid caps, of which, as you mentioned, biotech stocks are generally small and mid. So we see some bullish long-term action, also in relative terms, from the biotechnology sector.

Speaker 2:

Looking at an ETF like XBI, however, it'd be really hard to imagine that they are breaking away from the market, right? So I would expect that they too see some kind of corrective action. Perhaps it's delayed until September, so I don't know that I'm a buyer right here right now. I'd probably be inclined to wait for that corrective phase just for a better entry. But the sector as a whole has really seen a pretty meaningful shift in that relative performance, so I'm intrigued by it. I think it's a good one to own. It doesn't have the same loss of upside momentum shared by some other areas of the market. So I'm also intrigued by healthcare and I don't think that you need to be real discriminatory on the group level, necessarily at this point at least. But we'll see once we get into the next corrective mode, how that unfolds.

Speaker 1:

So let's look at the TAC ETF holdings. I find it interesting, and a good example of being active, that your top sector allocation is consumer staples XLP clearly defensive to your point. Second is healthcare. Tech is the lowest weighted, at 12%, versus what you typically see in the S&P, I think, at 33% or so. It seems to be like this is the real bet If you're going to be active. It's really about just one sector. Let's talk through why the much lower weighting there.

Speaker 2:

Yeah, so we actually equal weight the sectors. At least that's where it starts.

Speaker 1:

That would make more sense from what I'm hearing. You're my third interviewer. I apologize.

Speaker 2:

They start at about 12.5% and of course, throughout the month that weighting will change to some degree. So what you're seeing there, of course, is the outperformance over the past few weeks from healthcare, from staples, relative to technology, and yet we equal weight the sectors in part. We're not trying to be an S&P 500 proxy, but rather trying to reward the sectors for their relative performance at always, irrespective of their size, performance always irrespective of their size. Where that becomes a sort of a drawback would be if it is all technology all the time right. So we've always told tech holders that in a strong tape, go ahead and supplement tech with your positions in NVIDIA or CRM, any of these tech stocks that we honestly get the most questions about. It just seems to be where people's interest lies. So we feel like that's a great way to kind of navigate a certain tape.

Speaker 2:

So right now we would be comfortable with just TAC as a core holding and we would have already reduced that technology sector exposure outside of the TAC ETF. So it's a conservative approach with the equal weighted sort of you know, sector exposure. But what we're doing also is we're only choosing eight sectors out of 11. So we're basically omitting the bottom three by our metrics and these are long-term trend following gauges that we're using. They're long-term overbought oversold metrics. This is all based on monthly data and also some relative strength in quantitative inputs that we're using. There are long-term overbought oversold metrics. This is all based on monthly data and also some relative strength and quantitative inputs that we're incorporating there as well. So it's almost like a very dynamic but also sort of a slow moving shift. To pick up on the shifts.

Speaker 1:

What are some of the quantitative metrics that you look at that help go into the decision-making there?

Speaker 2:

Yeah, I mean a lot of it is about relative performance.

Speaker 2:

So the model is proprietary, but it is trying to measure relative performance over history and just making sure that we're on the right side of those trends.

Speaker 2:

So I'll put it that way we feel that the sector dispersions that we see year over year like with the best performing and the worst performing sectors sometimes being, you know, 60% away from each other it's really remarkable that dispersion every year. Really, we think that's a great way to try to outperform the market over time. And yet we also really pride ourselves in adding value in terms of risk management. So in our research and also in the ETF, we really prioritize risk management, because I personally think it's a great way to use technical analysis and use it as a complementary discipline to others. And you know we have ways to identify breakdowns and momentum shifts and overbought, sell signals. These things can all contribute to our sort of movement to more riskasuries, sort of our closer to cash equivalent there, long-term treasuries and gold and sort of combined exposure when the sectors aren't doing what we want them to do right. So it's almost like the sector will leave its bucket empty and we'll fill it with these other asset classes.

Speaker 1:

So you've been managing the tech ETFs since, like March of 2022, from what I saw, you come from the research and, first and foremost and leaped into the fund management world. What's been the most surprising aspect of running a fund? Because I don't know if people realize exactly how, when you have a public vehicle, it's very different than trading from a discretionary perspective your own account vehicle.

Speaker 2:

It's very different than trading from a discretionary perspective your own account, yeah for sure. And it's also very different than being a technical analyst, right. But we feel that from a top-down perspective, that technical analysis can really be a major value add in not just stock or ETF selection but also in portfolio management, trying to understand how to weight different products and where to kind of shift into from that allocation perspective. So we think technical analysis applies really very well to portfolio management, but there is a lot more to it, right? So it was the portfolio construction. That was something that was new to me, but we outsourced some help on that front and I learned a whole lot as we went along.

Speaker 2:

So otherwise, in terms of surprises, I used to joke that, well, once we were listed on the NYSE, we even rang the bell, which was probably like the pinnacle of my career. It was so exciting for me. But you know, once we were listed, I said, oh well, good, so now it's all good to go, we're ready. And yet of course, as you probably know, distribution is a whole other nugget. So I think that that's been. The big surprise is that it doesn't really sort of sell itself. You really have to get out there and make sure that people know the story and have exposure to the product and access to the product. That access to the product is not an easy thing to get on all fronts.

Speaker 1:

Yeah, given my own experience, you also have to develop something that's different, because you can't compete against BlackRock and Vanguard being an S&P closet indexer. You've got to do something more on the active side, which of course, means that it hurts you when you happen to be maybe launching the exact wrong cycle, aside from the distribution and asset gathering end of things, as you look through that journey as an ETF portfolio manager, is it a function of it being harder than you thought it would be, or is it a function of it being totally different? I mean talk about sort of what you learned.

Speaker 2:

Yeah. So I wouldn't say it's necessarily harder, except on that front. More like the distribution and marketing, it's a whole new world, quite frankly. For me there's almost like an ETF subculture that I know that you're a part of, where everybody seems to know everybody. But the good thing about that is it creates a network and everybody is very generous, honestly, with information and sharing their network. So it's actually been kind of a nice community to be a part of. Everybody is sort of in it together, I feel like in terms of the ETF community. So that's been a nice surprise, if anything. So I would say all in all it's been a positive experience. It's not easy. It definitely requires a know at the business side of things versus the technical analysis side of things, and I think I'm probably better at the technical analysis part than the business part, but it's all you know sort of part of it. So I've learned a lot really.

Speaker 1:

Our mutual friend, mr Jeffrey Hirsch, giving you a shout out saying excellent guest Michael oh thanks. Excellent host, also Jeff. Come on now. I saw a comment from Jeff saying excellent timing as far as going neutral right From a seasonality perspective. We know that Jeff's very big on seasonality, yeah for sure how much do you factor seasonality as part of that process?

Speaker 2:

How do you allocate it. We don't let seasonality inform our decisions such that it would change our mind on something that really comes from our methodology, which is based primarily on these momentum gauges that overbought our result indicators Very mathematical, really, Almost to the point where we feel like we're a reporter and just collecting data and imparting it. We're a reporter and just collecting data and imparting it. The seasonal information and data will definitely sort of set a tone, though, in terms of how we're interpreting some of the data that is driving our decisions right. So we know across the board and, of course, with Jeff's help and the Stock Traders' Almanac September is the worst month. It's the worst month for not just the S&P, it's the worst month for Bitcoin and it's a pretty reliable long-term seasonal pattern. So that definitely is in my mind when we're making a decision, but we're not going to let it sway us enough to go against the weight of the evidence from our methodology, from those indicators that we use.

Speaker 1:

Yeah, you sent me a note saying this environment should favor more active management, and I feel like every time I myself have that hope, I'm disappointed.

Speaker 2:

It's a self-serving statement.

Speaker 1:

Yeah, of course I mean we're both active managers from that standpoint. But let's actually go through that. First of all, define what that means like a cycle that favors active management. What does that actually mean in practice?

Speaker 2:

You know. So to me the passive cycle was one that was driven by that mega cap leadership, right, so you were benefiting from buying the S&P 500 by sort of riding that mega cap leadership because of the heavy footprint there. I know that there's some index structure changes that might change that to some degree at least, but even still, passive investing really pays off when there is narrow leadership in that mega cap complex because of their footprint in the major indices, of course, and that would be a more difficult environment for active managers when, frankly, at least at least in US equities, there's just less stocks that are exhibiting positive relative strength. I remember before we got into this phase that the market's in. Now we just did our usual review we do a weekly review of the trucks of the S&P 500. And we focused in on the ratios on one of these scans and we noticed that really it felt like it's probably an exaggeration but it felt like maybe 25 names had positive relative strength. So that kind of narrowness is what was really challenging.

Speaker 2:

It's funny because a lot of, I'd say, in the media you read about it as being narrow breath. It really wasn't narrow breath. Most stocks were participating in the uptrend and you saw the breath, like the AD lines or advanced decline lines, rising with the market. So breath was okay, but the leadership was narrow and that's what made it so challenging for active managers, because if they didn't have that positioning well, then obviously they weren't able to add the same amount of value as they probably can in a broader market, and broader in terms of leadership Also a market that is rewarding small and mid caps because there's a lot more stocks there to choose from.

Speaker 2:

Performance, I think, lends itself to an environment that is probably better or easier for active managers or will highlight the strengths of having at least a portion of a portfolio sort of designated for that active management. So I think it will come back in, just like every cycle does, and you'll see that how managing risk, also in an environment that is characterized by more volatility let's say, our VIX cycles, you know, on average on the high volatility cycle side, are like nine to 12 months, something like that, which is shorter than a low volatility cycle in general. But you know, if we have this high volatility cycle for the next nine to 12 months, well, risk management is going to be pretty important in that context and obviously active managers have the ability to manage risk in the same way that you just can't do by buying and holding in the S&P 500.

Speaker 1:

And, by the way, that's, I think, a very underappreciated point. Active tends to do well or better in higher volatility cycles, where it's more about down capture as opposed to smooth environments on the risk on side where it's about up capture, which is why almost nobody on the active side can really beat the S&P when it's the only game in town because you get whipsawed playing defense when your signals play defense.

Speaker 2:

So does that imply, then, that for active management as a cycle to work, you need to have drawdowns, because there's a direct link between volatility and downtrends? Yeah, I mean, I think it is a favorable environment for it, but I think they can also thrive in environments that have broader leadership, that are still like a proper steep uptrend, right, so an uptrend that has, you know, more sectors participating than just technology. Well, that's something that would be easier for an active manager to leverage right and to outperform during that type of environment. So it's that concentration that becomes the issue, not as much the volatility in that case, but volatility of course. Not as much the volatility in that case, but volatility of course contributes the same type of, I guess, need for active management. But I think, over the long term, right, we, at least in our portfolio, have created what we feel like is a great alternative to a buy and hold right, because our hope is that people can buy the ETF and basically forget about it and really not worry about the big drawdowns, because we have ways to manage through those drawdowns without really any work on behalf of the investor.

Speaker 2:

So we feel like, by missing a good portion of those drawdowns over the history of the market. You really are just well served by that. Of course you're starting from a much higher place when you're reinvesting in the market. You know you really are just well served by that. Of course you know you're starting from a much higher place when you're reinvesting in the market rather than riding, you know, a 2008 all the way to the low. So we really believe in sort of cutting losses in those types of drawdowns and indeed even the corrective phases. You'll see how asset allocation for one can really help, you know, sort of by a pretty good measure, minimize the drawdowns even during corrective phases.

Speaker 1:

So you mentioned the neutral positioning. What would get you to turn outright bearish and how would you position for that?

Speaker 2:

Yeah, it's always a good question, so it's never like a singular thing for us and that's why people have to keep coming back to us, I guess, because it's a weight of the evidence approach, right. And this is where the subjectivity comes in. You know, we obviously have inputs. You know, like these long-term momentum gauges, that they are not negative. You have like a minor downtick, so they would have to maybe not flip to sell signals necessarily, but show more of, I guess, more deterioration than they have done. So I'd say deterioration in long-term momentum gauges. We would also expect to see a non-reaction to oversold readings and that could be short-term or intermediate terms. So that non-reaction is often a message from the market where you have this like oversold extreme and there's every reason for the stock to bounce at a certain level fundamentally and it just doesn't happen, right. So that's kind of a bear market cycle indication and it comes more from our bottom-up work versus our top-down work. But that's just as important.

Speaker 2:

You can't just look at the S&P 500. You have to look at the constituents as well to really get a sense of what's going on. And to that end also we look for breakdowns. So if we start to see breakdowns and they don't have to be major breakdowns, but just a lot of breakdowns with low short-term support levels. Well, that also kind of shows a crack in the market that we would at times be respectful of.

Speaker 2:

It often also manifests itself in a breadth breakdown. So if those breadth metrics really deteriorate in a way that they have not done either, you know, show some breakdowns of their own, that would be, you know, very concerning as well. So we have sort of that weight of the evidence you know, and we'll kind of tone it based on how oversold perhaps our longer term metrics are at the time that we see this deterioration. As to where, you know, sort of that downside could take us, we don't have the ability, of course, to predict where the S&P is going to be at your end or anything like that. But we can focus on key levels, key support levels, resistance levels to at least get a sense of what the upside or downside potential is for a move, and that will help people sort of assign a risk reward to their positioning, and we think there's huge value in that. So we focus a lot on support and resistance too.

Speaker 1:

So I'm super interested in this. What would it take for you, for TAC, to not have large cap equity exposure and be all in on small caps, whether small cap sector funds or small caps broadly, because it seems to me that everyone's been focused on this. I've been talking about it forever. Small caps hold the key. I myself believe there's a ton of relative performance potential right. Not clear how it happens. It could be down less, up more and it's held relative to that July low. But what would it take for you to really have high conviction there?

Speaker 2:

Yeah, and listen, we have had the relative performance shift in, I think, a pretty meaningful way. It depends on what you're looking at as a benchmark, but you'll see some of the ratios small cap benchmark versus large cap like the S&P. You'll see that the ratio is getting back above their 200 day moving averages and this is after you know a-year proper downtrend in the ratio. So we do feel like it's a meaningful shift. But again, it might be something that goes way to more in-line or balanced performance as opposed to really decisive outperformance, and we could say that maybe to a lesser degree but in certain segments of the international equity markets. So we feel like those long-term downtrends have potentially a way to more balance or range-bound environment ratios. What would it take to see something that's more lasting? Well, usually what we like to see for a long-term turnaround is kind of a combination of things, one of which is a little bit of a support discovery or a basing phase. So more than just the relief rally that we have seen from small caps versus large caps, but that same sort of relative stabilization that has a little bit more longevity to it, to show that, okay, this ratio is really done going down. And with that then you'll start to see the momentum gauges improve at the same time and it creates some divergences. So that's where we start to get excited about it as more of a lasting potential shift, I think.

Speaker 2:

So we of course don't have that yet. We would not in the TAC ETF. We are large cap focused, so that will be always large cap exposure, unless it's, of course, in these alternative asset classes. We are developing another product that will have a bit more, you know, farther down the market cap spectrum in terms of exposure. We feel that you know, sort of combining it for the TAC ETF isn't what the goal of that model is. But indeed, you know, hopefully we'll hit the cycle right and capture an opportunity there which we just haven't really seen in recent history from small caps.

Speaker 1:

Seems to me like a lot of things also depend on the direction of the dollar. Here. I mean, to the extent that the dollar weakens from some kind of secular perspective, you can argue there would be other shifts in terms of sectors that lead and lag and things like that. What's your take on currency strength? I think this is also kind of an important part of what's going on currently.

Speaker 2:

Well, it's been a while because the dollar index it's really range bound.

Speaker 2:

So if you kind of zoom out and look at these charts, it's been an exercise in frustration for us because we have sort of changed our intermediate term bias on the dollar numerous times within the context of this really kind of neutral long-term range. If anything, it seems to be resolving lower, meaning dollar weakness should be more persistent than dollar strength and that's primarily against the euro, just given the exposure in the dollar index. But you know the euro just given the exposure in the dollar index. But you know it could be more meaningful. I mean dollar yen. We have what could be a pretty big shift there if we reference the cloud model for one which is really relevant in Japan. So it could be more meaningful as a phase of sort of dollar weakness. But it's not a decisive breakdown that we have yet for the dollar index. But it's not a decisive breakdown that we have yet for the dollar index in our opinion, and it's not sort of a decisive long-term shift, but it couldn't certainly get that way.

Speaker 1:

When you communicate on tech, you're talking technical analysis. Do you find that that resonates well when it comes to advisors, allocators, Because from my own experience, a lot of people seem to like technical analysis, but from a story selling perspective, it's a little challenging because it's not just based on technical analysis but also your interpretation of it, which is where it gets to be nuanced, I think.

Speaker 2:

Yeah, I mean, listen, we've not had much pushback on that front and I think you know it's kind of like technical analysis as a discipline. I started doing this in 1997 professionally and boy has it changed, right. I mean, I used to have to go into every meeting and defend the discipline, right. So that would take up half the meeting and then, you know, the client would sit there skeptically for the rest of the meeting. So those days are really gone. Now I think people can embrace technical analysis as a great tool right for identifying opportunities, trends, managing risk.

Speaker 2:

You know some of the, I think some of the misconceptions about technical analysis that it's ultra predictive and that we're using, you know, astronomy and what have you. That stuff is by the wayside now that we have much better access to information, you know, through technology. So I think the discipline has really gained so much traction to kind of help our conversations with the end users of our products, whether it's the research or the ETF or the consulting. The demand is there and it really I'm biased but it should be there because you know the technical analysis. It's measuring supply and demand for securities right through price trends. Unfortunately, for some fundamental analysts there's going to be environments where the earnings of a company are not driving the price action in that stock. So it's when you have that sort of gap between the performance of the company and the performance of the stock that the charts can be really really very helpful, because it comes from market psychology and it is really more of a behavioral science.

Speaker 2:

In that way we're trying to understand what all the information out there, you know, is boiling down to in terms of the price trend, right, so are buyers willing to pay up and vice versa. So I think if we have that kind of uptake now on the technical front, I've not met any pushback. The strategy behind the tech ETF, you know, a combination of technical analysis and asset allocation, is something that most of the advisors we talked to are. They're really very comfortable with it. I'm sure there are some that are not, but they'll treat the ETF as either sometimes that's sort of a satellite position based on technical analysis, or even just as a core US large cap sort of blended exposure. So it just depends on what their broader practice looks like or broader portfolio looks like and how they sort of position it.

Speaker 1:

It's a good question to wrap up the conversation from Jim Duncan, given we talked about it before but worth reemphasizing. As an individual investor, is there access to the guest ETF? So talk about TAC, talk about maybe the platform somebody can access it. On to your point about distribution and where else people can find you, katie.

Speaker 2:

Yeah, so thanks for the question. Of course, you know, I feel like it should be available just about anywhere. There's still a couple of platforms that do not have access, but Schwab, any sort of online trading software, will give you access to the TAC ETF and many brokers too. We're on the UBS platformBS platform or in the Wells platform, among others. So I do feel like you should be able to access it almost anywhere that you can access the stock market in general, and if you can't, let us know. You can always DM me on Twitter or on LinkedIn and just let me know that you're having some trouble. It'll get back to you.

Speaker 1:

Everybody. Please make sure you follow Katie Stockton and check out TAC. Appreciate those that watch this live. I have one more Lead Lag Live video interview with Mr Peter Bukvar in about nine minutes, so stay tuned for that. Hopefully, my energy level will be as elevated.

Speaker 2:

Say hi to Peter for me.

Speaker 1:

I will, I will and I appreciate everybody that watched this live. Again, please, folks, check out Lead Lag Live on all of your favorite platforms Apple, YouTube and Spotify. Thank you, Katie, Appreciate it.

Speaker 2:

Of course, michael Take care. Bye, thank you.

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Michael A. Gayed, CFA

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