Lead-Lag Live
Welcome to the Lead-Lag Live podcast, where we bring you live unscripted conversations with thought leaders in the world of finance, economics, and investing. Hosted through X Spaces by Michael A. Gayed, CFA, Publisher of The Lead-Lag Report (@leadlagreport), each episode dives deep into the minds of industry experts to discuss current market trends, investment strategies, and the global economic landscape.
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Lead-Lag Live
Mastering Technical Analysis, Bond Yield Cycles, and Precious Metals Trends with John Roque
Uncover the secrets to mastering technical analysis in the financial market with our latest podcast episode starring John Roque! Prominent technical analyst and seasoned financial professional, our guest brings over three decades of expertise, having worked with industry giants like Lehman Brothers and Soros Fund Management. Together, we emphasize the elegance of simplicity in investment strategies and discuss the critical importance of focusing on natural market narratives instead of overwhelming complexity. Learn how past experiences from the early '90s to the present have shaped a grounded and effective investment approach.
Our discussion takes a deep dive into the intriguing world of bond yield cycles, where we unravel historical patterns and their potential implications for today's market environment. We explore the dynamic relationships between oil prices, inflation expectations, and bond yields, and how these factors could drive future market trends. You'll also gain insights into the surprising resilience of gold and its performance in different economic conditions, along with a detailed analysis of gold, silver, and mining stocks like the GDX ETF. Whether you're curious about macroeconomic indicators or the unique behavior of precious metals, this episode offers valuable perspectives.
Finally, the episode navigates the complexities of investing in China, dissecting the gap between its financial promise and reality. We also scrutinize various technical indicators such as moving averages, MACD, and rate of change, highlighting their simplicity and reliability. As we examine sector rotations and the anticipated corrective phase in tech, you'll discover which sectors might be primed for outperformance and why low beta stocks are currently in favor. From market trends to the nuances of investment risk management and sizing, this episode equips you with the knowledge needed to navigate the ever-evolving financial landscape confidently. Tune in to gather insights from seasoned experts and refine your investment strategy!
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But I think a lot of us in the business complicate things because we want to be smarter or smart, and Stanley Druckenmiller has a great line. He said you don't get paid extra for complexity. And so I'm a big believer in taking it one item at a time. If, ultimately, the items that I've chosen to work with come together and form a narrative, even better. But I'm not necessarily approaching any particular idea or thread or set of investments in order to produce a particular narrative. I kind of let the narrative come to me, and so I'm a big believer in choose C-A, trade A C-B trade each other for a long time.
Speaker 2:Makes a little bit of a history there as far as Mr Steve Chobin, which we can touch on towards the end here. But introduce yourself. How are you? What's your background? What have you done with your career?
Speaker 1:What do you do currently? Okay, well, thanks, michael. It's a pleasure to be with you and good to see you again. It's been a long time. So I've actually been doing technicals since the early 90s.
Speaker 1:I started with a pencil and a ruler, that's not a joke. On graph paper I worked for a guy by the name of Ken Safian and then I worked for him for four 90 stocks every single day, and the greatest signal then for bullish or bearish patterns was when you had to extend the graph paper to the above the margins by cutting off another piece of graph paper and taping it on and then extending the chart. And then you had to do the same thing on the downside when a stock broke the barrier of the paper. And then I built a lot of technical indicators when I was there. Ken Safian gave me a lot of freedom, and so I was bitten by the technical bug and I joined Steve Chauvin, with whom our connection is made because he introduced me to your father all those years ago. I joined Steve Chauvin and Lehman Brothers and I worked there for four years and I built and that's with a small B, not a big B I built the international technical product for Lehman Brothers.
Speaker 1:At the time, again, it was a small B, not a big B. At the time we didn't have a lot of technical information available to us, and I'll tell you how old I am by not telling you how old I am. There was one Bloomberg on the entire research floor at Lehman Brothers, so I'd get in the office at 6.30 in the morning, go around the corner to the other side of the floor, print out all of my data, go back to my office and input it by hand. That was the way it happened back then, worked with Steve for four years and then I went to work at Onhold and S Bleichroder for a long time. That went through two iterations of a French bank, spent some time at a small shop that was originally a broker on the floor, came off floor, closed the business. Then spent four years at Soros Fund Management, three years at Key Square Capital Management, which came out of Soros, a few years at Wolf Research and now here I am at 22B Research doing technicals the entire time.
Speaker 2:Do you think all that experience graphing by hands gives you maybe an edge compared to the new technicians nowadays that don't have a clue what that's like?
Speaker 1:I don't know if it gives me a particular edge. I think it grounded me in the blocking and tackling aspects of technicals. It made me realize how important a big base and breakout really was. It made me realize what a trendline break meant. It gave me confidence to be a little bit more aggressive if more stocks than one were doing it within a group a group strength, so to speak. It gave me more confidence on the downside if more than one stock was breaking down in a particular group. And it really gave me confidence to be more of a stock picker than having a market call.
Speaker 1:The least favorite aspect of my job is to have a market call. I prefer all the other aspects but I think the market call is the hardest thing to get right. But it gave me an appreciation for what let's say the old timers I say that respectfully because now I'm in the same camp what the old timers did with respect to technical analysis. And just to give you an idea which you'll appreciate because your dad came from the same school, steve Schaubin told me that when he got to Merrill Lynch in the late 60s the only thing he had on his desk outside of a phone and some graph paper and pencils was an adding machine, and they had an adding machine on the desk to help him calculate the moving averages, which gives you an idea how far along we've come since the late 60s to now. But it gave me an appreciation of all that kind of dirty work that you needed to learn to kind of appreciate the and I'll call it an art, because I think that's what it is.
Speaker 2:You made some point that making a macro call is the hardest and most challenging thing and obviously everybody loves to gravitate towards that. But I think you might have a sense of sort of where the macro might be headed, based on technicals, looking at bonds and potentially looking at rates. So I want to get to a session around yields here. As we all know, the last several years have been brutal for bonds, largely because of the duration crash, not a credit driven type of bear market. I am curious to hear your thoughts on how bonds are looking currently. I myself have noted that it seems like, as the yen has turned higher and volatility is kicking back in, coinciding with a broader slowdown in the economy, it seems like at least on the high quality bond side, yields are looking more and more interesting.
Speaker 1:I'm going to be honest and just tell you how I see it. This is purely technical. I'm not going to make any economic justifications or conclusions. I thought, michael and I say this softly I thought it was a really easy call to be long bonds in the summer of 2024. Let's say the early summer, may, june. I thought it was a really easy call. The yield itself, the 2-year I'm talking about here, was making a classic top. It was below cresting moving averages and I thought, as I think that the moving averages act as your bodyguard, especially the slope of the moving averages, and I thought it was an easy call to say buy bonds in May and June. Because I thought it was an easy call.
Speaker 1:It's my experience that in this business when you have something right at least on this side of the business, the sell side, you have to keep repeating it constantly so that people associate you with that particular call and that people who pay you will remember.
Speaker 1:So I've been doing it since May June. We had a yields conference in July. I said it publicly. Then I sent something out last night that was entitled Bond Bull Market, which just took a look at the entire US yield curve based on a scoring system I have and I said, with the yield returns five days out to 12 months, including year, to date, it's all negative. It's a sea of red. If the sea of red is accompanying yield action, well then the sea of green has to be accompanying bond price or note price action. And I said we haven't heard the phrase in a long time because, and you said earlier, we haven't had the opportunity to say it, but this is a bond bull market and I think rates are going to go lower and lower than most people in our business probably appreciate or can conceive at this time.
Speaker 2:Is that across all bonds or will there be some nuances in terms of the junk part of the marketplace? I'm really I'm addressing their credit spreads, because you conceivably, I think you can be both bullish and bearish at the same time, depending on which bonds you're looking at.
Speaker 1:I'm glad you qualified it.
Speaker 1:So I'm talking about treasuries, I'm talking about boons, I'm talking about gilts, I'm talking about Canadian bonds, I'm talking about sovereigns Sovereigns across the yield curve.
Speaker 1:And I said just a minute ago, I think we collectively in the business are going to be surprised as to how long and how far yields will go down. Just to give you an idea and I'm going to turn my head to the side because I haven't committed these figures to memory, but I'm going to read them to you If you go back to the early 80s, the two-year yield down cycles have lasted 19 months, 26 months, 48 months, 46 months, 38 months, 62 months, which was into the GFC lows and then 26 months into the COVID lows. If you base the history and the numbers that I just gave you on what we might expect and I say might, because nobody has a crystal ball here, certainly I don't then we might be in for a much longer stretch than most people appreciate. And I felt the same way and maybe this is a bad transition about oil as well, and I think most of us in the business are not going to be haven't yet conceived of oil in the low 50s.
Speaker 2:Okay. So I find that to be interesting because there's clearly a link between oil inflation expectations and then yields. I agree with that, and I actually just asked Mark Faber this question, because it does seem like every time you have a sniff of geopolitical risk and everyone thinks oil is about toan. He just doesn't want to do it.
Speaker 1:I agree again, they could not embrace good news, good news right.
Speaker 2:Good news from the standpoint of where prices would go right Right when prices right, so OK. So that's certainly that's probably a very contrarian call on the duration length of time. Right for some kind of a bull market in bonds. The Fed then lowers rates. Everyone thinks the Fed controls the bond market. I myself make the argument that the bond market controls the Fed Right. From that perspective, I wonder if you think that explains some of the gold strength that we've seen Historically.
Speaker 1:Historically, gold has gone up in deflation. It's gone up in inflation. It's had its biggest moves when the dollar has been weak, but this time the dollar has been, until quite recently, relatively strong, and yet gold has gone up. So I believe that when real interest rates go lower, gold should be a beneficiary. And during our macro yields conference, I made the same comment you want to be buying bonds here, here, and you want to be buying gold, and so I think that's the case, that gold is a beneficiary, for many of the same reasons that you've just mentioned.
Speaker 2:Let's explore that a little bit more, because I think gold doesn't have the same kind of excitement it used to at its apex in whatever 2011, 2012, right, I mean I think a lot of people are still very hyped around Bitcoin, around crypto, and nobody's really paying attention to gold, or at least there's a lot of skepticism. When you talk about bases and these big bases, all right, I mean gold has been in this long sideways period as making you high, so it's not exactly a base, but I wonder if the length of time that gold has gone sideways makes you more bullish on it.
Speaker 1:I think part of the reason that gold does not generate excitement like it did in prior cycles is because there are probably five people you know their names, I know their names. There are probably five people still around managing money today who have ever made real money in gold. Everybody knows their names. So I think for that reason, most people in the business who got in the business over the last 20 years or so, you haven't really needed it. I mean, you really only needed tech, and I realize tech has gone through a few bear markets during that time, but each time tech has gone on to make higher highs. So I think there's little excitement for gold and even less excitement for gold equities, because you haven't really needed them. It might be that the enthusiasm does show up and maybe that drives us to more important levels for gold, but I like it here and I continue to believe that it is not well-owned. And then to your point about bases. Gold and silver too are historically base and breakout metals, and gold is at all-time highs. Silver is not there. Silver really needs to break out to get going, but both have been base and breakout metals since the early 70s when gold was finally removed from its shackles and allowed to float freely.
Speaker 1:So I'm a big believer in the base and breakout situation. For my own interest, that's the most secure pattern that I could find. It doesn't mean I'm always going to win with it, but, as Damon Runyon said, that's the way to bet. You want to bet with the favorites and base and breakouts to me with it. But, as Damon Runyon said, that's the way to bet. You want to bet with the favorites and Basin Breakouts to me are favorites If you had to choose one over the other.
Speaker 2:Is there any compelling technical reason to choose silver over gold or gold over silver?
Speaker 1:Well, because gold's had new all-time highs and silver's not. Silver, I think, gets a little tarnished, no pun intended, because it is also an industrial metal. But here's what we know, michael when there's a gold bull market, there is always a silver bull market, and when there's a gold bull market, there's always a bigger silver bull market. It's just that silver is not yet out. So I want to give the benefit of the doubt to gold to be the better performer, but I enthusiastically look to silver to provide some clues that it's ready to join in with its big brother Sarsby.
Speaker 2:How about the stock side, the mining end of things? I mean, you and I both know that they don't exactly track each other, but any thoughts on the mining stock?
Speaker 1:Well, I'm a fan of the GDX, which is the VanEck gold miners ETF, but it is stilted and it tends to kind of draw you in with big promise because when it breaks out you look like you're going to get a big run and then it pulls back. My own experience suggests that you don't want to chase this on a breakout. You'd be better buying it on pullbacks to, let's say it's upward sloping 50-day or upward sloping 100-day moving average. But it isn't a bullish trend. It is just so stilted.
Speaker 2:Let's take a little trip around the world, because I think if you're going to make an argument for gold or silver to your point about the industrial side, you partially have to be aware of what's going on with China and some of the emerging economies. I happen to think that China is perhaps the ultimate contrarian trade, just because everyone's so wildly bearish on China. What are your thoughts on investing in China from a longer term perspective? Shorter term, different discussion, right, but on a big basis and kind of doing things, not doing much for very long. That seems like it's the prime candidate.
Speaker 1:Okay, so I'm going to say something critical, but not of you, of course. I'm going to say something critical about the business. The business promoted this tremendous narrative, and I'm going to use a line that I've used for a long time If you are a Catholic, you went to the Sistine Chapel, if you are Jewish, you went to the Western Wall, and if you were a hedge fund manager, you went to Shanghai, because that was your promised land. And now the Shanghai composite is roughly in the same place. It was going back to the early part of 2007. So it's been a long time of doing nothing. So it's been long on promise and very short on delivery. It might be it might be that we are at the bottom of the range, but I would just offer that. It's just not my style, it's just too hard for me, and I'm going to say something that might color me as a bit of a wise guy. Maybe we'll know that China's a buy, a real buy, when firms start hiring India strategists rather than China strategists.
Speaker 2:That's an interesting way to frame it right, because that's where the attention span or the demand is for the research Correct? Yeah, interesting. I want to get into some of your favorite technical indicators and what you tend to gravitate towards. As you know, there's a ton of different indicators and signals out there. Some of them are valid, some of them are not. I joke that I think a lot of people that reference technical indicators are basically doing squiggly lines, largely from their basements, because they don't really test it and there's a lot of room for interpretation of the stuff. But what are some of the things that you find are fairly accurate over time?
Speaker 1:Okay, so when I first got into the business, you all know the name, phil Roth, who was a contemporary of Steve Chauvin and a contemporary of your father's.
Speaker 1:And Phil Roth worked at the time at Dean Witter and he was known as the indicator man. I think it's cool that a technical analyst, a former technical analyst on Wall Street, had a nickname. He was known as the indicator man, and I remember when he gave a talk and I believe it was at the Market Technicians Association, which it's no longer called that right, of course, it's called the CMT group now, but he gave a talk and the brochure was, you know, kind of, come see the indicator man, phil Roth. And he used a million indicators. And I was a young guy in the business I thought that's the way, that's the model I should follow. In fact, when I went to work with Steve Shobin, he said to me you know I'm indicator light, so I hope that you can help solve that problem. And so I think I addressed it. I don't know that I solved it, but over time, when I first started to add indicators to my, let's say, my golf bag for lack of a better metaphor or analogy it's been a long time that I have actually reduced the number of indicators that I look at, and I'll tell you that because I found that most indicators just confirm each other and then we get into indicator confirmation and we tend to see the signal as being overly strong.
Speaker 1:Most price indicators just confirm each other. They're just based off of price. It's just that there are different periodicities. So stochastics might be among the fastest than RSI and maybe MACD might be among the slowest. I consider myself a trender, not a trader. I prefer slopes of moving averages to help me. I prefer MACDs to other indicators because I think it kind of fits my style Also do like to use.
Speaker 1:So I'm not going to contradict myself, but I'm going to add another one here. I like to use rate of change indicators, especially 52 week rate of change or 12 month rate of change, and I am big on the number of new highs and new lows on the New York Stock Exchange. That, to me, is probably the most important market indicator that there is, because, no matter how highly we consider ourselves to be terrific stock pickers or how well we think of ourselves as terrific stock pickers, we're only really good stock pickers when the stocks we own are making new 52-week highs. If 52-week highs are not growing, then we're modest stock pickers, at best modest, and if new lows outnumber new highs, we're rotten stock pickers. That's kind of my bailiwick of indicators. I really don't move away from those because I want to keep it simple. I want my language to my readers to be simple and I don't want to clutter it by having to, let's say, interpret the characteristic of a particular indicator and why I'm using it over something else.
Speaker 2:Where are we on breadth now, on new highs, new lows?
Speaker 1:Breadth recently made a new all-time high.
Speaker 1:So breadth is at a new high, recently made a new high, while the S&P was weakening ahead of it. So that's a very curious conundrum because normally, normally corrective phases occur when breadth weakens ahead of the S&P, but it's happening in reverse now because the big seven stocks, let's say two handfuls of stocks, are weakening ahead of breath. So the broader market is holding up a little bit better. And with respect to new highs and new lows, new highs are roughly in the mid 100 to 200 level on the New York Stock Exchange and new lows are in the double digits. So there is a fair amount of new highs, not a great amount of new highs. The cumulative net new highs, which is an indicator I use, just like breath, for the New York Stock Exchange, is better than the cumulative net new highs indicator for NASDAQ. So I've been, let's say, suggesting that it's a better idea to not be so focused on tech. Number one, because it's no longer monolithic. Number two is it's relatively easier to find winning stocks on the New York Stock Exchange versus NASDAQ.
Speaker 2:Yeah, that's an interesting point. As far as the listing side of things, let's expand on tech a little bit. You mentioned rate of change. You've seen the same ratio charts. I've seen around. Tech divided by the S&P looked very eerily reminiscent of the lead up to the March 2000 ratio top and then very kind of quickly turned around. Are we finally at that moment where the cycle's changed for tech leadership, where that momentum is not going to be as prevalent, as strong as it was?
Speaker 1:I think that's a really sharp question so I'm going to try to give you a decent answer. So I actually did. I was one half of a tech team on a technical pardon me on a technology webinar yesterday and I did the technicals. But again, I'm trying to emphasize, I'm a trender, not a trader. So I showed what I think are two really key charts. The first one is NASDAQ relative to the S&P 500.
Speaker 1:On a log scale going back to the early 70s, I think we're in the fourth turning and, michael, this gets to your question there have been three prior turns lower for NASDAQ to underperform the S&P, going back to the early 70s. The first one was from May of 72 through 1974, 76, because it was an elongated low and during that time NASDAQ underperformed the S&P by 30%. The ratio went down 30%. The second was from June of 83 through October of 1990. The ratio went down 43%. And the third one was from February 2000 into the 01-02 low and the ratio went down 58% in favor of the S&P 500. We've had a fourth, albeit abbreviated, version that occurred from January of 21 to December of 22, where the ratio moved lower in favor of the S&P in an outperforming cycle for the S&P versus NASDAQ by 23%. We are now making a lower high relative to the prior high in 21. So I think this is the fourth turning where NASDAQ will be out of favor relative to the S&P 500. So that's the first chart and I went over that yesterday and it's caused some dialogue back and forth with participants and or people who get my work.
Speaker 1:The second one and I mentioned rate of change a few minutes ago when you asked about indicators, if you go back to the late 90s and you just use the S&P tech sector against a rate of change indicator, in just 12 months you'll find that this is the ninth kind of cycle turn lower for the rate of change indicator, suggesting that tech's upside is waning, and other corrective phases in this rate of change indicator going back to the late 90s where the technology sector have seen tech correct on average 36% with a median correction of 29%. So the way I kind of operate my work here is that I find the smallest corrective phase over each of those cycles, and there were eight of them. The smallest one is 15.5%. So that's usually the one I try to work with. I don't try to use the average, I don't try to use the maximum one. I try to use the smallest one because that comes with no hyperbole.
Speaker 1:So I think we're in a corrective phase here for NASDAQ or tech. It would not surprise me if tech went down about 15% from, let's say, I believe it's going to break the August low. So I think ultimately we'll go down 15 or so percent and I think NASDAQ is going to be in an out cycle relative to the S&P 500.
Speaker 2:All right. So, if I'm hearing that right, you think that after that decline, tech would not then be the outperformer that you're Would not? Would not. Okay, so you have some extra rotation. Yeah, so what would be some of the other sectors that could replace it? I mean, this is a little bit to the growth versus value discussion.
Speaker 1:Of course. So first of all, I think low beta is better than high beta here. Number two is I've been a fan for many months of utilities and real estate. I realized JP Morgan's getting hit pretty hard here, but financials are still in good shape, as are staples, and as are industrials still in good shape as our staples and as our industrials. So those are the groups that I prefer relative to tech. So it might be that tech can correct and the market comes in some, but these groups can do a relative outperformance in this period, although they've been showing some terrific absolute performance so far on a year-to-date basis as well. And healthcare pardon me, Michael, I should have mentioned healthcare.
Speaker 2:Yeah, let's talk about healthcare, because I'm actually I've been more talking about healthcare as sort of a sponge for some of that hot money that's gone into tech, right, I mean healthcare, as you know, is bifurcated between GLP, large cap plays and biotech which has been like small caps, have done nothing, done nothing for the better part of a year plus.
Speaker 1:Is there some part of the healthcare space that looks particularly interesting to you? What I found is, amongst all sectors and all markets globally, is that big is superior to small. Now, I'm not saying the Russell is not worth it, I'm just saying big is superior to small. So within the healthcare space, it's actually the biggest stocks that are the leaders there. I think the XBI, which is the biotech ETF, is building a base, but it is quite reluctant to break out. So it is not a particular subsector that I'm focusing on within healthcare, it's just the biggest stocks there that have the best patterns. That's kind of the way I'm trying to play it.
Speaker 2:I wonder how financials would do with a bond bull market this time around. Yeah, the old adage is they're supposed to do well when rates are higher, right, so does that provide any sort of complication?
Speaker 1:to things it does. But, as I mentioned earlier, I'm a trender, not a trader, and I'm a big believer in using the following equation to manage your investments when we were young and we were starting in the business, we sat next to somebody who was seasoned market veteran and had gray hair and they said to you open your notebook, shut your mouth, open your ears and your eyes and take notes, because I'm going to give you some pearls and these pearls are going to keep you in good stead in this business. And so sometime later on, when you felt a little comfortable, you said to the person who was your mentor, who was your senior. You said I've noticed A and I've noticed B. And he said well, if you've learned your lesson, what should we be looking to trade? And confidently, I said C. He said you've learned your lesson. Good job, young man.
Speaker 1:I don't think that's the way the business works anymore. I think the business works like this you see A, trade A. You see B, trade B. You might never get C, you might get G, you might get L, you might get X, for all I know, but I think a lot. We want to be smarter or smart, and Stanley Druckenmiller has a great line. He said you don't get paid extra for complexity, and so I'm a big believer in taking it one item at a time. If, ultimately, the items that I've chosen to work with come together and form a narrative, even better. But I'm not necessarily approaching any particular idea or thread or set of investments in order to produce a particular narrative. I kind of let the narrative come to me, and so I'm a big believer in choose C-A trade A, c-b trade B C might never arrive Since you alluded to that point that it's not the way the industry works anymore.
Speaker 2:has it been harder to be a technician over time? I mean, is it true that markets have become perhaps more efficient because people are trading mostly the same kind of charts?
Speaker 1:I think it's more difficult because of the proliferation and ubiquity of machines and algos. It's also more difficult because of the proliferation and ubiquity of pod shops. I'm not knocking their approach, I'm just saying that it's made more difficult because there are many more gaps than I ever. Not knocking their approach, I'm just saying that it's made more difficult because there are many more gaps than I ever remember in my career. And I like to ask the question maybe this will paint me as a wise guy how come no stock that reports earnings ever opens in line with where they were the day before? Why is there always a gap?
Speaker 1:And I believe it's because, of course, people are positioned on both sides of that trade and the one who's right gets to sit back and watch the guys who are wrong scramble to close their positions, and that's exacerbated by pre-market trading. But I do think it's more difficult. I do think the business is more difficult because there are some, let's say, advantages that we would have had as market analysts that have been removed, because a person cannot be as fast as a machine cannot, which is why I think the advantage is in not trading but trying to think of your investments in a trending mindset. Yeah, I think it used to be the case that the gaps would get filled.
Speaker 1:Yeah, I don't know. That that's the case, I know. I just looked at RTX before I came in. There were gaps near the lows of a year plus ago. They were never filled. There was a gap quite recently. Will it be filled? I don't know. I think the longer you're in the business, the more likely you are to say I don't know. And I think when I was younger in the business I was more likely to say I'm pretty certain of something happening. Now I just say I'm trying to put the odds in my favor. Will I win? I don't know. But I'm trying to put the odds in my favor to give myself a chance, a better chance to win. But it's very difficult if you are trying to trade against the machines.
Speaker 2:Are there some markets that are perhaps better to use technicals on nowadays than was the case before? A certain asset class, that sectors where you find there's a higher hit rate, I think.
Speaker 1:Michael, it might be a little bit easier for me to answer the question if I kind of change it a little bit. I think it is easier to use technicals where people are not paying as close attention to that particular sector, market commodity index or when people's sentiment is so coalesced around a particular idea that I think it is easier to use it. And I'm going to go back to the example I made shortly.
Speaker 1:After we started talking with respect to the bond market, in May and early June, everybody and that's in quotes, of course, most people were convinced that we were in a higher for longer environment. And the same thing was true with oil. And I think the same people who are, let's say, short bonds were likely short oil that's my guess and I think it's been difficult for those positions to be unraveled or closed out, and I think that's why the yields and oil have trended so nicely since May June, at least until now. So I think combining technicals, where you're kind of comfortable understanding that the sentiment is to one side, I think that's a real opportunity to hit a home run. Do you prefer bull?
Speaker 2:markets or bear markets. Now, I say that very purposely because you've said correctly, it's about the trend. You're more a trending type of thinker. Problem is, as I think you and I both know, uptrends make it hard to show a value proposition when you're providing research, Because if any broke don't fix it, it's the S&P 500. It's the NASDAQ. Why do I need research? I speak about the CMT Association. I understand that most of the registrations go up in bear markets. Any thoughts on that? I mean, I got to assume bear markets are actually maybe better for business.
Speaker 1:I really haven't thought about it that way. I think for our PAs, bull markets are better. I'll take that as under advisement there because I think that's right. I think that bull markets and bear markets are both good for technical analysts, and the reason I believe that is because most people in our business are fundamental in nature. So I think technical analysts bring something different to the table.
Speaker 1:We hear all the time and I'm going to use a downside example to make my point we hear all the time that a stock that breaks down is cheap. And a client or an investor might say what do you think Should I be a buyer? This is cheap here, and my work or my experience suggests that it's likely to go lower. And I'll say no, I don't think this is where you should be stepping in to do some buying. And he'll repeat well, but it's cheap here. There's value.
Speaker 1:And my reply is has it finished creating value? Is it done creating all the value that it's going to create? And nobody can answer that question, which is why I think it's appropriate to kind of approach the answer to his question in a fundamental fashion, by using technicals to inform me of how I should be thinking about this. The same thing is true on the upside. I found, in this era where machines proliferate, that stocks go to the upside and they go to higher levels than most anybody in the business could likely have predicted, whereby they were expensive and get very expensive. So I think for that reason, trend really does help you at least understand more of what's going on than if you were just trying to do it with only one input.
Speaker 2:To your point about what you said earlier, it's easier to be technical on things which most people are not focusing on. Are there certain things that most people are not focusing on that are showing some interesting?
Speaker 1:movement to you now. Well, I still think the bonds are showing interesting movement, because I still believe that people have not yet embraced that rates are going to be much lower. I think also, people have not embraced yet embraced that rates are going to be much lower. I think also people have not embraced with oil, that oil is going to be much lower. Now I'm going to contradict myself for a second, michael. I hope you'll allow me to do it.
Speaker 1:We've all been taught that lower yields and lower oil prices likely suggest that economic activity is slowing, and I'm fond of using this line all landings are soft until they're hard. But if oil, lower moving oil and lower moving rates tell us nothing about the economy, then it's going to be difficult for people to kind of recognize that. Perhaps these inputs are really financial speculative tools financial speculation tools rather than economic tells. That's yet to be determined. Most people continue to be on the soft landing side of the ledger. But if bond yields and oil are to be believed, then maybe we should be thinking about something a little bit more important. But of course, my caveat here is if we don't get that final nail in the coffin with respect to, let's say, moving from a soft to a hard landing, then we're going to recognize that the machines are moving a lot of what's going on here and we should not interpret that or take from that an economic conclusion.
Speaker 2:It must drive you crazy every time people ask about the Fed because technically you shouldn't care about any of that. It should be reflected somewhat in price.
Speaker 1:I'm not a fan only because I think the Fed for the most part are academicians and they're operating from a theoretical point of view. Can I tell you a short story? This is your show, my friend. Oh, no, thanks, I just wanted to ask you. So I worked at a shop that employed a former Fed governor and he would visit our shop once a month and he'd sit in the conference room all day long and everybody on the investment committee would spend an hour with him during the day. Not to sound like a knucklehead here, but I didn't spend an hour with him because I wanted to learn more about price and I didn't think he could teach me about price. But I did speak to him a lot about the Red Sox, celtics, boston Bruins and the Patriots, because he was a Boston sports fan. Anyway, he comes down to New York one day some years ago and when he got to the office I said to him do you want to go to the bodega around the corner and get a bacon, egg and cheese for breakfast? He said sure, so we go down to the corner and there was a coffee cart where the guy was selling coffee and danishes. And I said to him how many civilians do you think a four-star general speaks to in a week? And he said John, how am I supposed to know that? I said the answer is zero. Four-star generals don't speak to civilians. They speak to people of like rank. Maybe they speak to soldiers during a photo op, but their schedule is so busy they don't have time to speak to civilians.
Speaker 1:I said how many civilians do you think a four-star general speaks to in a year? He said John, how am I supposed to know that? I said the answer is still zero. I said you're from New Jersey, aren't you? He said I am.
Speaker 1:I said well, then you might be able to answer this question how many civilians does a mafia capo speak to in a week? He said John. Now, how am I supposed to know that? I said haven't you seen the movies? Mafia capos don't speak to civilians, they only speak to people in that organization. The guy in charge doesn't use Pinterest, doesn't use Facebook, doesn't use LinkedIn. He uses a burner phone, speaks to one guy in his ear and that guy puts out policy. If you've seen any of the movies, you know what happens if policy is not followed.
Speaker 1:And I said, in order to avoid me asking you another question like that. The answer is zero as to how many civilians a mafia cop-out speaks to in a year. And then I said and now I'm going to ask you a question that I know for certain you can answer how many civilians does the Fed chair speak to in a week? And then he said now I get your point. My point is is that the Fed does not understand what's going on on the ground anywhere, and I've used the line that it is hard to know what's going on on the ground when you're sitting in the backseat of a Federal Reserve driven town car.
Speaker 1:When rates started to go up in 2021 and inflation was smoking higher, I wrote in one of my research notes and I gave an open invitation to Jay Powell and any member of the Fed to join me somewhere in the Bronx, anywhere on Webster Avenue, so that he could have explained to the good people there why paying higher prices for their groceries was in their best interests. Of course, nobody took me up on that invitation, but I'm a little dubious on central bankers. I think there are some important books to read about that. One is the Lords of Finance, and then there was a follow-up a few years ago called the Lords of Easy Money. The Lords of Finance had a subtitle the Bankers who Broke the World and the most recent one, the Lords of Easy Money, was an especially good page turner for finance nerds because it made you understand a little bit more as to how the Fed is run. Those are my answers to your question. Sorry for the extended story.
Speaker 2:No, I love it. I think it's very well said. I'll do a question from YouTube here which is a little bit of a macro but I think fits into a little bit of technical side. From Andrew, thoughts on the likelihood of stagflation how does this impact your bond thesis? Now, part of the stagflation argument is oil. So I feel like we might be kind of maybe already addressed that. But I mean, is that still a possibility for you know just when?
Speaker 1:you look at various charts and how different things are acting. So I'm going to try to be true to what I said earlier. I try not to think about the likelihood of stagflation. I'm not being rude to Andrew. I promise it's a good question. It's just that I'm not even qualified to answer it. I'm going to let the oil price and the action in the bond market and yields to kind of give me an idea about those particular markets, but without making the economic conclusion. I'd rather not make the economic conclusion. I'd rather have a strong enough position in oil and rates so that I can win before the economic conclusion is obvious. So it's a good question. I just don't think I'm qualified to answer it.
Speaker 2:I feel like we should talk about sizing a little bit, because it's never really quite addressed when it comes to those that are using technicals, like everything else. You have high conviction and you have low conviction. The more high conviction, ideally, the higher the weight. But how do you think about risk management when you're looking at different parts of the investment universe as far as different trend lines and different areas that you want to put money to work in?
Speaker 1:So I tend to approach it like this I'm big on using stops because I want to limit my risk and I don't know a fundamental story. So perhaps if you do know the fundamental story, you might give an investment a little bit more rope, so to speak. So I tend to think of it like this when ideas are working, I want to add to them. When ideas are not working, I want to reduce them. And ideally, if one idea is working while one idea is not working, I'll reduce the idea that's not working and commit that money to the one that's working.
Speaker 1:I tend to approach this very methodically or robotically. I let the ideas tell me whether or not I should have conviction in them. If it's not working, then I will write in a note this was wrong. I got it wrong. It didn't do what I thought it was going to happen. It has broken a key support level and I prefer to be a seller here and I'm out. So I'm going to close this idea and if one is working, I'm going to say here's a refresh, a review, just to go over again. I want to continue to be long-nested and on any pullback, so I tend to think of it methodically rather than in any other way, albeit I'm not perfect with this, I'm going to make mistakes with it, john for those who want to track more of your thoughts.
