MAGGIE LAKE: Hi, everyone. Welcome to the Real Vision Daily Briefing. It's Monday, June 6, 2022. I'm Maggie Lake, here with Katie Stockton, founder and managing partner at Fairlead Strategies. Hi, Katie. How are you?
KATIE STOCKTON: Hi, Maggie. I'm good. How are you?
MAGGIE LAKE: I'm doing well. Thanks. I think it's such a great time to catch up with you. Because so many people are looking at this market action trying to figure out how to position themselves, what direction everything's moving. It was such as a volatile choppy spring. And I think people want to reset here, as we enter this summer. We saw equities to that point, rally strongly at the beginning of the day. Then they wobble. They managed to end in positive territory with some gains. But you could feel the churn, the 10 Year Treasury moving back above 3%, which concerned equities. We have oil at 120.
I think it's a good time to take stock of where we are, from a technical perspective, which is where your strength is and your focus is, and try to figure out what we should do. Pull the lens back a little bit and get some perspective here. Let's start with equities because this is the question we get over and over again. Have we reached the bottom for stocks? Is the bear market bottoming? And is it time to step in and start thinking about buying some of the beaten up names? Or is there more pain ahead? What are you seeing with the price action?
KATIE STOCKTON: Well, with some hindsight, we can of course, say that we've seen a short term bottom at least. The relief rally has been pretty impressive for the major indices since last month, and yet and the question, of course, remains as to how sustainable this relief rally is. And I suspect that unfortunately, as we get into the summer months, that we might see a bit more downside volatility before we actually establish a proper intermediate or long term low.
And I say that primarily based on the longer term indicators. And it's an environment in which it's incredibly important to focus on the monthly gauges, in our opinion, because they are really setting the tone, where since late last year, we've seen a pretty meaningful loss of upside momentum. That's not news to anyone at this point, but it really accelerated at the start of this year.
And with that, of course, we saw downside leadership from the mega caps that the large cap technology names, the thing plus Microsoft and Tesla complex. And of course, that's an environment in which it's really impossible for the major indices to work their way higher when you have their downside leadership. That leaves us at a place where we're looking for a bottom. And yet, we don't feel like it based on those monthly indicators that we haven't yet.
If you look at something like a stochastic oscillator, which is an overbought oversold measure, it's not oversold yet on the monthly chart of the S&P 500. If you were to look at the monthly MACD, which is a gauge that is trend following or momentum based, that's on a fairly new sell signal. It's a little bit disconcerting, the posture of that indicator. It does tell us that we are in probably a bear market cycle within what we think is still a secular bull move.
And yet, when you look at the cloud model, which is another one of our trending gauges on a chart that we've shared with you, you'll see that it's pretty well below current levels. And that creates not really a vacuum necessarily, but it does give you a sense that there is still some downside risk, perhaps. And that's where we turn our focus to the important levels in the charts.
MAGGIE LAKE: What levels are you looking at? I think this is really important, because you get the sense that people want to step in here and start buying. If you look at some of the declines from the highs they hit and I know that is that's dangerous territory to do that. But if you look at that people, say, wow, this tech stock is down 30%, down 40%. Some of them are down 80% from their highs. The worst has to be over.
What are you looking at from the broader index? Then we'll dive into some sectors in some more detail later. But what are you looking at from the broad index in terms of downside for the S&P 500? How much more pain could we see?
KATIE STOCKTON: The latest break down point was roughly 4200. That's looming nearby as potential resistance. We don't have a lot of conviction as to where this relief rally ends, but we think it'll end fairly quickly. And with that, we think we'll see another retracement, downdraft and retest of important support, which is about 3815 in our work based on a Fibonacci retracement level.
Once that level is tested, we'll have a good sense as to whether this downtrend is going to keep hold and we suspect it will keep hold based on those longer term gauges. We're looking for a break down and then the secondary support becomes about 3500. That might be the endpoint for it. We can't be sure. We really rely on our indicators to give us a sense of when we have that long term low at hand.
We'll wait for those gauges to turn. It's not just a level that we're focused on as a place that we'd be adding exposure. We really want to see some stabilization. And unfortunately, that's what we don't have yet. I agree with you, there's a lot of people out there looking for entries, especially some of the technology stocks that have been so beaten up. And yet, we feel like it's too early to suggest that we have something that has a shelf life to it.
And we don't want to have to become traders trying to navigate these two, three weeks swings. And we fear that the market is going to be in for more of that for the summer months. And we're looking for a low to be established somewhere in this September, October timeframe. TBD as to whether that becomes an intermediate or long term low though, so there's still a lot of variables out there to consider.
And with the higher growth arena, they are deeply oversold long term. If you look at the same long term gauge that we look for at for the S&P 500, they are now oversold. And yet we suspect this is the tape that requires not like a V bottom, but rather some basing phase which means it goes sideways perhaps even sideways to lower with a lot of volatility, before finding that support level undergoing accumulation to a great degree where it actually is ready for a base breakout.
We think it's going to be more of a process than an event in terms of a low and that's why we're not in a rush to buy even the most oversold names in the market.
MAGGIE LAKE: It's super, super important. And that kind of environment is not for everyone. If you're a trader who's glued to their screens all the time, and you thrive in volatility, and you know how to use instruments around that, great. If that's not your cup of tea, it sounds like you got to protect yourself and stay clear through some of this. A couple questions. First of all, we have Michael and Bo, both asking what happens going into VIX expiration, options expirations next week? Is that something that affects the way you look at price action? How do you take into account those sorts of events?
KATIE STOCKTON: It's not really my universe, the expirations. I do know that they can influence price at a certain point in time. But my approach is more just based on the technical indicators that we're using, looking at momentum, overbought oversold readings, especially overbought oversold readings as it pertains to the volatility index or VIX, because that is not your normal trending instrument per se.
I know things can get pinned at various levels, but it's not really where we spend our time. But we want to make sure we're eliminating any noise that that creates by looking at things that are smoothed versions of the VIX or the S&P 500 or any other market benchmark. As it pertains to the short term view of the VIX, the VIX has certainly pulled back, already create notably, as we've seen a relief rally in the S&P 500.
It is now fast approaching what we think is support around its 200-day moving average, which is it is pointing higher now. And that's a reflection of the high volatility cycle that the market entered a few months ago. We're looking for another higher low to be established by the VIX. And that would be our indication to recommend hedging and strategies for our clients.
MAGGIE LAKE: So, be careful about buying the dip based on what you're seeing. What about selling into the rally? Are in an environment where you have to-- the old saying, buy the dip sell the rip? Are we in an environment where you need to be thinking about being agile and selling a bounce here?
KATIE STOCKTON: Yeah. So, to the same end that we'd be hedging with the VIX up term, we'd be selling with an S&P 500 downturns. We're really attuned to our short term indicators, watching for any deterioration, of which it would be more meaningful right now, because the market is trending lower, as opposed to in an up trending market, we'd be less inclined to really react to say a short term overbought downturn.
We're really, I'd say, hyper focused on the short term gauges and unwilling to take on the risk that we think it's inherent to this market right now. We are a better seller in general, and we're just taking it from a bottom up perspective on a case by case basis to see how the indicators shape up.
MAGGIE LAKE: I want to talk sectors in a moment. In this environment, we've seen some of the headlines. Hedge fund manager has been around for a long time. This has been a really difficult market. Things are moving, or relationships that used to exist breaking down, everything down. I understand launched a new ETF to try to avoid some of the drawdowns, so that people have some powder dry when there is a little bit more clarity. Talk to me a little bit about that. Well, what strategy are you using?
KATIE STOCKTON: Well, it's called the Fairlead Tactical Sector ETF. So, it is sector focused. The ticker is TACK or T-A-C-K. And the design is to leverage sector momentum and relative strength primarily. And yet, of course, as you note, it has an asset allocation piece to it to the strategy. And that when those sectors are not firing on all cylinders, we do see that model move into a combination of short term Treasurys, long term Treasurys and gold.
And that diversification does help TACK minimize drawdowns. We've already seen that since its inception. And it's really important as you know to mitigate risk in this type of environment. It's really very appropriate for what we see to be at a higher risk type of tape for the major indices, where we can still leverage the sectors that are working, of which at present, that's not many of them. It does have exposure to the energy sector for one. And that might not be a historically defensive sector, but it is a sector that is working right now.
Otherwise, the sector exposure of [?] is for defensive, utilities and staples, and then we have those risk off pieces in the Treasury exposure and the gold exposure. Taken together, it's a very conservative strategy to approach US equities, large cap and focus, and designed to reduce drawdowns. But also to be there when the market does come out of this type of mode. And I think that's really a problem for a lot of us. We don't have the confidence to get back into a market after, let's say 2008 type of environment. It takes us almost much longer than it should, let's put it that way to get back to our full exposure.
MAGGIE LAKE: Yeah. And so, this senses it, and does it for you and starts to reallocate as the indicator suggests that that needs to be happening. It sounds like overweight energy utilities, which makes sense healthcare, I think, is on that list as well?
KATIE STOCKTON: Right. In our research, we tend to be intermediate term and focus, whereas TACK's a bit more long term and focus. And intermediate term relative strength is still benefiting. And of course, energy, utilities and staples, but also, we have as overweight healthcare and materials. And those sectors have just done really well in this environment of [?]. And of course, there are some market cap considerations to keep in mind in terms of the heavyweight positions in those sectors.
Healthcare does have a defensive tilt, as some of the large cap pharmaceutical exposure. But we like those sectors as relative performers. And yet in a downtrending market or a bear market cycle, unfortunately, relative performance doesn't necessarily mean you're making money. And that's the hard part because most of us don't live in a relative world. We of course, want to beat the S&P 500. But we really want to make money.
And unfortunately, that relative strength really hasn't done much in terms of producing absolute gains. I think the best example is probably, if you look at that consumer staples and the influence of Walmart's disappointment, that corrective phase has been there for now a few weeks. And it's unfortunate, but these sectors don't look as good in absolute terms as you would hope.
MAGGIE LAKE: And what are areas that people should think about being underweight or reducing exposure to if they haven't already. It's funny because I feel like some of the stuff that's been doing well in this bounce, does that hold for a more intermediate term? Or is that something that you should be aware of? And if you're in it, you got in it and rode this little bounce, think about reducing exposure again. What should we be underweight?
KATIE STOCKTON: Yeah. And I think that's the mindset is to be selling into strength, or taking this gift of a relief rally from the market and remembering how it felt before the relief rally. And with the underperformance that we've seen from the technology sector in particular year to date, I think we need to respect the trend there has been lower. But within that context, of course, we are benefiting from a brief phase of outperformance that we think will ultimately recommend focus use as a selling opportunity.
Not quite there yet. Communication services is another downtrending sector relative to the S&P 500. And also consumer discretionary. Some of these again, you need to have that market cap consideration. Amazon, of course, for one is a big piece of that consumer discretionary portfolio for the sector SPDR funds. That's something to keep in mind. But to us, it's a short term oversold bounce something to be used as a selling opportunity to avoid at those downtrends in relative and also in absolute terms.
MAGGIE LAKE: And what we'll try to share some of Katie's charts after this conversation, so you can you can take a closer look at what she's talking about. I want to ask you about the Chinese tech sector. I know that you're watching that as one of the sectors. And we had a lot of news on that. That was one of the early catalysts today after the Wall Street Journal reported that Chinese regulators were wrapping up their investigations into Didi, the ride-hailing company, this uber of China.
That stock jumped. I think it was 50% at one point. I'm not sure if it closed there. But a lot of people taking this as a signal, that maybe that government crackdown on tech is finally coming to an end. What are you seeing from a price action point of view here?
KATIE STOCKTON: Technology, and I'd also lump in the high growth names here domestically along with these Chinese tech benchmarks like a KWEB as an ETF representing the space. We feature that ETF recently as one that seems to be turning the corner, finding that footing, maybe not from a long term perspective, but at least from a short term perspective. And our basis for that was simply looking at positive divergences on the latest pullback. And we started to see some breakouts above minor resistance levels, like the 50-day moving averages.
And the impact, of course, was favorable on our intermediate term gauges as well. We wanted to make sure to highlight that. And we had heard in our conversations that well, at least China had some potential positive catalysts. They were thinking more in terms of the reopening, of course. But it's something that drew our appeal to it. And of course, we've seen bullish price action there. And it does reflect short term risk on positioning. We've seen that with the relief rally in the S&P 508.
It's hard to picture China doing very well if we enter into the next down like here pretty soon. We're somewhat non-committal to the counter trend move. But for now, it's working. And we really don't have a lot of sell signals to speak of. We often drive ourselves signals from the DeMark indicators. And we're not seeing a lot of sell signals on that front yet. And with these short term breakouts, that can exacerbate the momentum behind the move.
For now, it seems to be working. And I think that's helping preserve the risk appetite here in the near term. We also have a little bit of a blip higher and Bitcoin for one [?] and that as another source of risk appetite for investors. When we come in the morning, and we see Bitcoin up, say 5%, well, that at least is better than the alternative for the equity market to which it's been very highly correlated.
MAGGIE LAKE: Yeah. It's so interesting that you bring that out, because we know that cryptocurrencies have been getting just hammered in this risk off environment. We did see that bounce today. But a lot of people, much like other parts of the market, still really worried about the direction of cryptocurrencies or Bitcoin. Ash Bennington spoke with one of them, Imran Lakha, the founder of Option Insight, who warns that he still thinks there's risk in this space. Let's have a listen to that clip.
IMRAN LAKHA: If ETH wants to continue underperforming, which I think it probably will in a move down towards 20k on Bitcoin, I'd be surprised if Ethereum outperforms that, given the higher beta and nature of it. I think it will go down. I think this ratio will probably go down. And the levels that we need to be being keep an eye on is 0.055, which is that old level, that old support zone, which we got to in summer last year.
Then below that, I've got a retracement level there at 0.048 from the entire rally from the lows made back in December or January 2021. We've got some big levels there. And to put it into some context, if Bitcoin was to get as low as 20k, then getting to 0.05 on this ratio would basically take Ethereum to 1000, which is a half from here, basically.
So, you got to be open minded to the idea that even though we've come off so