JAKE MERL: Welcome to Trade Ideas. I'm Jake Merl, sitting down with Katie Stockton of Fairlead Strategies. Katie, great to have you back on the show.
KATIE STOCKTON: Good to be back.
JAKE MERL: So today, we're going to be talking about the stock market. We've just broken out to new all-time highs, the S&P is trading above $3000. So do you think it's a good idea to be going long here, given this recent breakout?
KATIE STOCKTON: I think you still can until there's major signs of upside exhaustion. And we really don't have those yet. If anything, there's a short-term overbought condition. But those tend to be managed really well when we do get the breakouts that we're getting on the individual stock level. So that's the important thing to note, breakouts tend to exacerbate the positive momentum behind the market. And that's indeed what we have with the S&P 500.
JAKE MERL: Is there a specific sector you're most interested in or you're most bullish on right now?
KATIE STOCKTON: I would say really always technology is the primary sector for me, having exhibited leadership over the long term. But I'm really also very interested right now in Consumer Discretionary. It's been another long-term leader but has a fresh breakout in relative terms that I think is compelling.
JAKE MERL: So as you mentioned on either absolute or relative chart, you see that breakout, but are there any other technicals that's confirming your thesis?
KATIE STOCKTON: Right. So in something like the Consumer Discretionary SPDR, which is XLY, that broke out in absolute terms, as you mentioned, and you can derive a measured move price target of about $138, $139. I think that ETF is currently around $124. So that's pretty compelling as a long-term upside gauge with that breakout supported by positive momentum. And I say that across timeframes. So short, intermediate, long-term, the MACDs or moving average convergence divergence, indicators are all positive. So that's very compelling. And we did see a nice successful test of support at the rising 200-Day Moving Average with that relief rally in June. So I think it's fairly compelling.
JAKE MERL: So it has moved pretty far in a really short amount of time. What are the odds it just consolidates from here rather than heading higher?
KATIE STOCKTON: It could consolidate, I would place the odds somewhat low with the momentum still there behind not only discretionary but the broader market. The overbought condition is not too concerning yet, because it's not that widespread. You'd think it was more so really with where we've been. And yet, I still think there's upside with those targets.
JAKE MERL: So Amazon actually makes up 23.5% of the ETF. You've Home Depot just over 10%. You have McDonald's at 7%. And then you have Starbucks and fill their names around 5%. I think it's five stocks make up 50% of the ETF. Are you looking at those charts of the individual holdings as well?
KATIE STOCKTON: Of course, I think the bottom-up work is really important. So always to look at the individual stocks that comprise these ETFs or these benchmarks. And as you could imagine, Amazon and its other- appears in that Top 5 or even Top 10, generally are very favorable charts, long-term uptrends, long-term upside momentum based on that MACD indicator again, and the moving averages are generally pointing higher. And that's my preferred setup in a strong tape. It's a trending market. So we generally want to have positions, long exposure in outperforming stocks, and also stocks that are in long-term uptrends in absolute terms. So that would qualify really for all those stocks you mentioned.
JAKE MERL: So what key levels would you be looking at for XLY in terms of actually putting on a trade?
KATIE STOCKTON: For support, now that 200-Day is a bit far below to use as a gauge of risk or a stop loss, so instead, we'll use the breakout point of about $121. And with that upside gauge, based on the measured move around $138, $139, I think that creates a very compelling risk reward.
JAKE MERL: And over what time horizon do you expect this to play out?
KATIE STOCKTON: Long-term. And my version of long-term is about six months plus.
JAKE MERL: And what would you say is the biggest risk to this trade?
KATIE STOCKTON: Really the market. If the market loses that breadth and the momentum, of course, that would trickle down into the leading sectors first. So that would be the biggest risk. And yet, sentiment is still very conducive to upside follow through. We have that momentum, we have the breakout, so I don't see any signs of that at this time.
JAKE MERL: And so I know you're an expert in technical analysis, but are you looking at anything from a fundamental perspective that could impact your trade?
KATIE STOCKTON: I leave that to the other experts, the fundamental experts. And I do believe that earnings drive stock price trends. So that's very important to have a fundamental foundation for your trades. But of course, an ETF gives you a little diversity. You can have positions in the underlying constituents and there and get a little bit of a less risk to that.
JAKE MERL: Well, Katie, we'll see how it plays out in the months to come. Thanks so much for joining us.
KATIE STOCKTON: Of course.
JAKE MERL: So Katie is bullish on the stock market. Specifically, she likes buying the Consumer Discretionary ETF, ticker symbol XLY at current levels with a stop loss after two daily closes below $121 and a target price of $139 over the next six months. That was Katie Stockton of Fairlead Strategies and for Real Vision, I'm Jake Merl.