Big Uptrend. Tech Momentum Fading | Katie Stockton on the Rotation Investors Are Missing

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**Matt Zeigler** (1:02)
You're watching Excess Returns, a channel that makes complex investing ideas simple enough to actually use where better questions lead to better decisions. I'm Matt Zeigler. Justin Carbonneau is actually in charge here today. Don't let him tell you otherwise. We have one of our favorite technical analysts back with us, Fairlead Strategies' own Katie Stockton. What's good, Katie?

**Katie Stockton** (1:23)
A lot, I think. So far, so good for the summer.

**Matt Zeigler** (1:26)
I like the sound of that, especially post-4th of July. So straight into the deep end. Last quarter, we talked about a continued long-term uptrend for the S&P.
Wouldn't we all like that? Nice, easy, quiet summer, hanging out by the pool.

**Katie Stockton** (1:43)
Rarely ever. I know that used to be sort of a guarantee, didn't it? But not so much anymore.

**Matt Zeigler** (1:49)
Don't people take vacations? What? Did COVID ruin this? So you're seeing some shorter-term potential warning signs. Let's start here. Let's get this chart up. What's going on?

**Katie Stockton** (1:58)
Yeah, the shorter term, I mean, there's been a loss of momentum. We're maintaining right now neutral bias.
And the rationale behind that is simply the loss of momentum. You can see it in the moving averages, like the 20-day moving average, for one. That's a very close, sort of tight moving average. And normally, we might just ignore it. But when you have such a steep trend, and then it loses enough steam to have that 20-day rollover, we do pay attention, it has been an environment where it has been just this really steep up move from the leadership, as you know. So that puts us on guard for any loss of momentum.
The consolidation phase that initiated in June is neutral. It has a hold right now. And we're going to simply watch the boundaries of that consolidation pattern to determine whether we want to go more risk on or risk off.

**Matt Zeigler** (2:55)
So this is a place where I think the whole overbought and oversold part becomes really interesting in your work because we achieved overbought. So actually define those terms and you're the way you define them first. And then let's talk about what we've moved through with that momentum loss.

**Katie Stockton** (3:12)
Yeah, no, it's a good question because I do think overbought and oversold are terms that are overused, right? They should reflect positive momentum. So overbought is a function of positive momentum.
And when it makes a difference, when it has sort of the implications that the word suggests, and it's when you see the down ticket momentum. So it is measurable though, both overbought and oversold, we derive from the stochastic oscillator. So for us, it's either above 80 percent is overbought, below 20 percent is oversold. That's how we define it. It might mean different things to different people, but it is measurable. So when technicians who are professionals are talking about it, they usually are referring to an actual indicator, as opposed to just something feeling overbought or oversold. A better term would be overextended, right? One way or the other. So if somebody feels like something's overextended, that would be maybe a good way to label something.
But the overbought condition, you'd be hard pressed to find that missing from a stock or a security that's breaking out, right? So it's a normal function of a breakout or positive momentum. But when you get that downtick and the stochastic oscillator for us rolls back below 80%, that's where you have a so-called overbought cell signal. And that's when you want to take action, right, in terms of risk management.