Katie Stockton Still Sees a Bull Market. So Why Is Her ETF Only 50% in Stocks?

Matt Zeigler (0:02)

You're watching Excess Returns, the channel that makes complex investing ideas simple enough to actually use. Better questions lead to better decisions.

Justin Carbonneau is with me. I'm Matt Zeigler. Our guest is the founder and managing partner of Fairlead Strategies, Katie Stockton. Welcome back to Excess Returns.

Katie Stockton (0:19)

Thank you so much. Good to be back.

Matt Zeigler (0:22)

Well, it's fall, and luckily, nothing has happened all year.

All the charts are just flat. We've got barely anything to talk about. How have you been, Katie?

Katie Stockton (0:30)

It's been pretty wild, hasn't it?

Matt Zeigler (0:33)

I'd say it's been more than a little bit pretty wild. So let's get into some charts. Let's get some stuff on here. Last quarter, we talked about this short-term loss of momentum within the long-term uptrend, which is why your unique perspective is valuable here. Where do we stand right now from a long-term perspective looking at the S&P?

Katie Stockton (0:52)

Yeah, I mean, listen, the secular bull market is very much alive, and I'd say mostly well at this point, despite all the chatter right now about market breath and otherwise.

The cyclical uptrend is even also intact. It has deteriorated to some degree, x the large cap indices, so S&P 500 just reached a new high, so did the Nasdaq 100 So we've had that concentrated leadership, and that has been constructive. If we consider the market to be the S&P 500, well, we're in pretty good shape, although it's not been an easy tape for people to navigate.

Matt Zeigler (1:34)

Talk to me a little bit about long-term overbought and where we are moving away from some of those indicators right now.

Katie Stockton (1:40)

Yeah, so long-term overbought conditions are very much widespread, I would say, and they do impact the major indices. Now, we did see over the summer months some deterioration in the monthly indicators. And it was concentrated, of course, in the same areas that we saw downside leadership during that correction. So like the semiconductor sector would be the best example.

So we have downturns and it's those downturns that we feel are more impactful and worrisome than just an overbought condition in and of itself. So we're not terribly worried about the S&P 500's stochastic oscillator, nor the NASDAQ 100, because it did recover enough to avoid that downturn. But we do have those from a bottom up perspective. So that gives one a little bit of pause. And I think if we can apply it specifically to the segments of the market that saw those downturns, it would suggest that perhaps they will not be able to reach new highs relative to the peaks that they made perhaps in June.

Matt Zeigler (2:48)

I'm glad you brought up segments, because I want to ask you about breadth too.

We saw advanced decline, that line has rolled over sharply, but we still have the index up and elevated where it is. What does that tell you on a breadth standpoint?

Katie Stockton (3:01)

Yeah, I mean, it's been a pretty dramatic breath pullback. And I think that's what has made this market so difficult for people. And what has also impacted market sentiment in a negative way.

Negative almost to the point where it's positive from an entry perspective, right? Without so much of a pullback or correction, of course, in the large cap indices. So pretty unique environment in that regard. But the pullback is in breath. So the cumulative advance decline line is still within an uptrend. So we like to use our weekly cloud model to that end to discern whether it's an uptrend or a range or downtrend. And it's still technically an uptrend based on that weekly cloud model.

And the last pullback, which was from Theban to March, that was of course a more dramatic pullback in the major indices, but nevertheless, it did also hold up within the cloud-based support. So we're seeing this as a correction or pullback in market breath. It certainly could be the start of something worse. But as it stands coming into early Q4, there is a short-term oversold indication from not only that advance decline line, but then also some of the other breath metrics that we tracked. I would suggest that we'll see some kind of snap back here in market breath. Already maybe some minor inklings of that.

Matt Zeigler (4:25)

Talk to us about breath divergences. How much do we put emphasis on them when we see them? Because this is that, you hit on it already, it's like the sentiment that we feel when we're talking about this stuff, but it doesn't necessarily rhyme with what the numbers are and how this is playing out.