Yesterday we welcomed back to Talking Markets Katie Stockton, the founder and managing partner at Fairlead Strategies and PM of the TACK ETF.
Thank you , , , , and many others who joined us on Substack…!
Cloudy with a Chance of Exhaustion
We had that big dip in April followed by a pretty epic relief rally, but Katie is now seeing “signs of short-term upside exhaustion” in DeMark indicators.
On the S&P, she said: “We are looking for a return to the 200-day moving average, which is initial support on the chart (above). It was around 5810 this morning. And we think it would be hopeful to suggest that that’s the end point for a pullback.”
Add to that, Katie sees a “loss of long-term upside momentum that’s pretty meaningful” in the monthly chart, as well as “some signs of upside exhaustion based on the longer term DeMark indicators.”
💡“So we’re looking for this to be more of a cyclical sideways or down move within this broader secular uptrend,” Katie said. “So, operating in a higher risk type of context from a long-term momentum perspective, and then you pile on top of that the loss of short-term momentum. We do think risk is elevated… It’s been an exercise in patience waiting for the so-called pullback to unfold.”
2022 Playbook?
So with both short term and longer term showing the same loss of momentum, Katie says “we can liken it probably most closely to sort of a third or fourth inning of 2022 as a bear market cycle. And we did see a bottom around October of ‘22, so we feel like we could be in store for a similar playbook, but with a bit more volatility on a short-term basis.”
💡However, Katie does see potential for a short-term up move “that can become kind of violent,” which would be signaled by an “open by the S&P 500 above 6079.” Another flag Katie is watching that might signal they’re too bearish is a couple of VIX closes below 17.
What About All That Resilience?
While it’s “remarkable” how resilient the market has been in the face of geopolitical tensions, budget concerns, bond yield concerns, etc, Katie says DeMark signals are picking up that that resilience has started to crumble a bit behind the scenes.
A good example of this is Nvidia:
“You can see that even though they have maintained their momentum on the surface, behind the scenes there is a loss of momentum,” Katie said. “[And then] combine that with a loss of breadth that is likely after we just saw the percentage of stocks above their 50-day moving averages reach 80%, which is an overbought threshold.”
💡Yesterday, Fairlead downgraded the technology sector to underweight with a short-term perspective versus the S&P 500.
Sector Outlook
Where the TACK ETF is positioned is obviously aligned with where Katie and Fairlead see long-term opportunity for relative performance on the sector front:
“We are pretty defensively positioned,” Katie said. “Consumer staples, real estate, and utilities are components of the TACK ETF, as well as risk-off ETFs in short- and long-term Treasuries, and gold.”
Katie On…
Europe: “The pullback has already started there,” Katie said. “The last few days have been pretty terrible for European equities. They’re closer to the Middle East, which maybe they’re being penalized for, but you can’t help but feel like it’s going to carry over to the US.”
Energy: “If you’re willing to take a short-term position, I think you can leverage the relative performance from the energy sector here,” she said, adding that “natural gas is starting to appear to resume it’s uptrend.”
Consumer Discretionary: “We’re moving to an underweight on consumer discretionary because we’ve seen a loss of short-term momentum there.”
Consumer Staples: “We’re overweight consumer staples, [as] its ratio against the S&P 500 now has oversold indicators that are somewhat compelling.”
Metals: “We’re expecting an improved momentum set-up for gold,” Katie said. “[But] what’s been more interesting is platinum and silver, both of which have pretty major breakouts,” while palladium “feels like an early stage turnaround.”
Treasuries: “We have signs of downside exhaustion for long-term Treasury proxies, suggesting that they will start to outperform equities again.”
Enjoy,
Maggie
Important Disclaimer: It is crucial to remember that this article is for informational purposes only and should not be considered investment advice. Consult with a qualified financial advisor to assess your risk tolerance, investment goals, and overall financial plan.
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