The Technical Edge: Markets in Focus

Adam Turnquist (00:00):

Welcome everyone to the LPL Market Signals Podcast. Adam Turnquist here, Chief Technical Strategist at LPL Research and I'm hosting this week. Super excited to bring in Katie Stockton of Fairlead Strategies. She is a household name within the technical research community. She leads Fairlead Strategies, an independent research firm, registered investment advisor based out of Greenwich, Connecticut. Katie is CNBC contributor and is all over financial media. Many of you have seen her out on CNBC or many of the major news outlets. Prior to founding Fairlead Strategies, she was the Chief Technical Strategist at BTIG and Chief Market Technician at MKM Partners. Katie earned the chartered market technician CMT designation in 2001. And Katie, you'll have to correct me if I'm wrong here, but I believe you have a record. You were the youngest female to get your CMT, is that correct?

Katie Stockton (00:55):

Yeah, I could say that at the time. All right. I certainly couldn't say it now.

Adam Turnquist (00:59):

Well, we really appreciate you joining the show today and really excited to get your thoughts on the market. You're someone I followed throughout my career going back to 2006, 2007. So let's start with just a little bit of a background. I think talking to technicians, the career path, there seems to be no two of the same in terms of how they got into technical analysis. So let's start there. Going back to when you initially started in financial markets, what drew you to technical analysis?

Katie Stockton (01:33):

Yeah, and I appreciate the introduction, Adam. Thank you. Glad to join you today with technical analysis. I certainly didn't know what it was when I went to college but I was a mathematical thinker, is the way I would describe myself. And when I ultimately applied to the business school, it was an undergraduate business school. I was drawn to finance, I think just simply because of that, just I liked the processes that they introduced at the sort of 100 level coursework. And just took an interest then in financial markets and how dynamic they are. And the way I was introduced ultimately to technical analysis was through an internship. I had an internship with the old PaineWebber, and I remember one of the advisors had on their desk a report, and the report had a bunch of X's and O's on it, and of course it was point and figure charting.

Katie Stockton (02:29):

So, and that intrigued me because I just had never seen anything like it. And ultimately, gaining an understanding of what it was, enlightened me to this more visual approach to the markets. And I think that inspired me, picked up another internship, working for that same firm that published the point and figure chart as Dorsey Wright and Associates, and was there for a couple of years. And the rest is really history that set me on the path to being a technical analyst. And throughout my career, which had its twists and turns, there was always a technical element to what I was doing, either as maybe a sales assistant or a trader. I was always bringing that expertise in the charts and that's where I am obviously today, publishing charts and research and doing the same thing that I really started my career doing.

Adam Turnquist (03:23):

So you founded Fairlead Strategies, took the leap of faith and went out on your own. Talk us or give us a little insight on Fairlead Strategies, what you're doing there, and then dive into maybe your process and framework for how you're looking at markets.

Katie Stockton (03:40):

Well, that's right. So I went from a sell side career on Wall Street to starting my own firm, effectively an independent research provider, although now we also have an ETF that we manage. And at Fairlead, I wanted to bring technical analysis to Main Street, not just Wall Street. So I wanted to expand my reach and therein started a subscription service that was pretty accessible to the end user. And in these reports of which we probably produce maybe 10 reports per week, so really prolific, we have a very systematic approach. So people get to know our methodology really very well through our research. And it consists of technical indicators that reflect, I would categorize them three ways, trend and momentum as one category, overbought, oversold inputs as the next, and relative strength or relative performance inputs as the third. So we wanna arrive at a conclusion based on all of these indicators in the charts. We are using our primarily bar charts with lots of moving averages, the technical indicators, and we spend a lot of time focusing on key levels, key support and resistance levels. As part of our process, we're looking at a whole lot of charts, and then we're also working with data that we can pull in from these technical indicators.

Adam Turnquist (05:06):

All right. Good stuff. We got a good background there. Let's dive into the market because obviously a lot going on in equity markets, fixed income markets, energy markets. We've had this very strong v-shaped recovery. I think a lot of people were caught off guard by just the rate of change in this, we'll call it one-way price action. So how would you characterize the current market regime that we're in right now, and do you foresee that lasting?

Katie Stockton (05:33):

Well, we know that it's a secular bull trend. I don't think anybody could argue against that. But then also we have a cyclical bull within that context right now, that bull is very bifurcated, and I think that's what is catching a lot of people off guard with the narrowness of the leadership on the upside, and how in our bottom up work, if we're talking about the US equity market, you're seeing a lot of variety in the charts. There's charts that are in proper downtrends and charts that are in parabolic uptrends. So that's how we feel. It's somewhat bifurcated. But, I feel like we wanna honor the bull cycle, but then also acknowledge the risk associated with steep and narrow bull market regimes and really focus in on those charts in particular and watch them for a loss of momentum. And so there's all sorts of ways to measure that. We're using things like the MACD indicator, which I'm sure Adam you use as well. Yes, to understand if momentum is strong or not. And that's our primary focus right now, I'd say, is watching the momentum behind the likes of the semiconductor sector in the AI trade, which have been that primary source of leadership.

Adam Turnquist (06:54):

All right. So bull market still intact, respecting the bull market, even though there's some narrow leadership looking at things from a technical perspective, what are some of the most important charts or signals that you're watching right now on maybe the shorter term basis?

Katie Stockton (07:10):

We always have the S&P 500. It's, first and foremost, that's where we're getting our primary top down views. But then also I would consider like macro technical inputs like crude oil, treasury yields. Of course, the sector work as having equal importance in terms of supporting what we're seeing in the major indices like the S&P 500. So we're looking at a lot of charts to support our equity market view, and we're applying those same indicators to those charts collectively. And we're doing it not just, over one time horizon, but we're looking at short term, intermediate term, long term simultaneously, because the long term will be that driving force behind a trend. But clearly market timing isn't informed by monthly indicators, but rather shorter term, daily and weekly indicators. So we look across timeframes for opportunities and we start with those major indices, but we drill all the way down to the stock level to help our clients find opportunities as well.

Adam Turnquist (08:17):

All right. Good stuff. So what's, we'll call it the base case for your outlook on the S&P for the rest of 2026 here.

Katie Stockton (08:26):

Well, it's been our belief that this would be a more volatile year and that can go in both directions. And I would argue that it has done that so far, both to the downside initially and now to the upside. So we're looking for a positive second quarter that's an easy call to make, I think at this point, with that eight consecutive up weeks right in the S&P 500 but a more volatile market on the back of this as well. So looking for some kind of corrective phase over the summer months that could be dramatic just by the nature of that concentrated leadership and of course have sometimes these parabolic up trends get ahead of themselves, and the retracement can be somewhat severe, although we don't have evidence of that yet. So we just wanna honor the up move that we have underway until we see that overall for the year.

Katie Stockton (09:14):

We don't make a practice of assigning objectives at year end because we would be guessing we'd have some weight of the evidence to use for that guess. But rather we really just try to stay on the right side of the market at any given time. But our sense would be that we're not going to see a market like we saw in 23 to 25. We think it'll be more muted in its returns. And as mentioned, characterized by bigger swings over intermediate term timeframes within that context. So where we finished on December 31st, we really don't know but we would certainly be focusing on the short to intermediate term indicators in a way that maybe wasn't as important in previous years.

Adam Turnquist (10:00):

All right, fair enough. And I think that's a valid point, right? We don't know, we know we're in a bull market, but there's a lot of variation in how we finished the year. You mentioned volatility being higher. Have you been surprised when you look at the VIX back down near multi-month lows, we've again had just a one-way direction in price action. So you look at, we'll call it the micro, the earning story, very bullish. Then you go to the macro, you look at where oil is, you look at interest rates. Does that square up with you where the VIX is trading right now? Or have you been surprised by the relatively low volatility we've had?

Katie Stockton (10:39):

Well, you could view the low volatility as somewhat complacent, right? In terms of like a sentiment read, but it could certainly be more complacent considering what we're seeing out there in terms of perhaps some valuations that have gone quite extreme. But extreme for a reason, right? There's certain themes that everyone is on board with particularly AI and, they're looking for that next big winner. And so we understand where it's coming from. The complacency though hasn't at this point reached what we would call dangerous levels. Sentiment can be measured a lot of ways. The VIX included, we like the fear and greed index is another metric, and it shows greed in the marketplace, but it's not as extreme as it can get. And certainly not extreme enough to say, okay, we're in store for some inverted V top. So we do keep an eye on sentiment. But the VIX is just kind of muted. What we care a lot about there is when it reacts to the oversold conditions in a meaningful way. And if anything we have seen some support discovery from it that is a little bit disconcerting, given its inverse correlation to the S&P 500.

Adam Turnquist (12:00):

Right. Sentiment seems to be all over the place depending on where you look, whether that's the University of Michigan consumer sentiment. Whether that's the AAII data, which the bull bear spread there, negative, even though the market's making new highs, it doesn't really set up with the adage that sentiment follows price. And maybe to your point, we're not at extremes. There's capacity before you reach those, we'll call it contrarian levels. I know you talked to a lot of investors out there will stay focused on sentiment here. Who are you talking to and what's the pulse in terms of sentiment from your discussions?

Katie Stockton (12:39):

So with Fairlead Strategies servicing anyone really, we have a very wide sort of breadth to our client base. It'll range from the largest, asset managers down to the smallest individuals. And so, and everything in between, I would say the bulk of our subscribers are FAs or RIAs. And the pulse there is, somewhat worried perhaps but not worried to the extent that it's changing positioning. So there's general sort of bullish positioning is my perception out there more because maybe there's a feeling that you can't afford to not be exposed to some of the segments of the market that are working. So it's just honoring that trend and almost in the same way that we are as technical analysts but then, waiting for some real deterioration before actually repositioning the focus is almost solely on technology. I wish it wasn't, frankly, but it really is. Investors seem warm to other sectors, but they are not asking me about them for the most part just voluntarily. I might offer an idea or a compelling setup to them that's say like in the defense sector or something like this, and they'll be intrigued. But in general, it's really all about tech and they're staying with the AI theme for now. A bit worried about inflation reasonably so but sticking to their normal processes.

Adam Turnquist (14:22):

All right. I think that's a good segue to talk a little bit about opportunity and risks in the market. You mentioned sector, bringing sector ideas to clients. So where are you currently seeing the most compelling opportunities at the sector level? Or are there any sub-sectors, niche areas of the market that look particularly strong on a relative basis?

Katie Stockton (14:43):

Yeah, for sure. It is really interesting if you track out on those relative rotation graphs at the RRG.

Adam Turnquist (14:51):

Yeah, we use those all the time.

Katie Stockton (14:52):

I can't remember the timeframe, but I think it's the weekly sector focused one that shows technology as the only one pointing higher up into the right in that RRG, which is pretty remarkable. And it does show that concentration on the sector front. So if we're talking about sectors that have momentum, they really are technology or technology adjacent, right? So semiconductors, networking stocks and kind of anything related to AI would be in that momentum category, both in absolute and relative terms versus the S&P 500. We are also intrigued by areas that are relatively oversold, but showing some signs of life, both also in absolute and relative terms. And to that end, we've been pretty vocal recently on software as a bit of a turnaround play, if you will. Just today in our research we highlighted home builders as reacting to oversold conditions.

Katie Stockton (15:51):

So that's a new and quite short term sort of idea that we've highlighted to folks. But otherwise we've been on board with energy in general. Oil and gas in particular looks relatively oversold. And so Nat gas seems to be turning the corner or at least stabilizing to some degree. And of course, crude oil has a major long-term breakout. We're keen on agricultural commodities and some of the materials steel for one. And then we're also newly interested in some healthcare segments, including pharma and defense, but defense and I'd say even transportation have a reaction to their relatively oversold conditions that is somewhat intriguing. And with that reaction, we're seeing some positive technical catalysts, things like triangle formation breakouts on the charts. And I guess the last sort of niche area I might highlight would be alternative energy. So if you look at the ratios and the momentum behind solar and batteries, you can see some really solid uptrends there and so as another source of momentum that's not in tech, you could maybe source alternative energy,

Adam Turnquist (17:13):

Right? A lot of the same themes we've talked about here at LPL research. So, good stuff. Good to hear. I'm glad we're aligned there. We just did a note on the ag space and something we've been calling out within our research is an attractive area with some of these recent breakouts there. Let's go back to software because we'll call it a bold call. I've had so many questions from advisors asking, look, has software bottomed, is this the point where you're gonna see a rotation from maybe semis back to software? What are your views there? I know you mentioned it looked constructive. Do you think the lows were likely set? And if so, do you think they're gonna maybe capture some relative strength from the semiconductors?

Katie Stockton (18:01):

Yeah, and there's certainly that trade out there, right? Where folks are have or have been long semiconductors in short software, and we certainly haven't seen an entire unwind of that trade per se, with semis still holding up really very well. We feel that we're pretty confident that an intermediate term low is in place and software, and I even add Bitcoin to that because Bitcoin has been positively correlated. The intermediate term gauges, weekly, MACDs, weekly stochastics support levels, et cetera, have really improved. Notably, we watched the cloud model too, and a lot of software names have cleared that cloud-based resistance, which we are intrigued by and should add some shelf life to the turnaround. Now, is it a long-term cyclical low? That is still, to me a little bit of a question mark. There are some indications of that there are long-term oversold conditions can be found and the likes of Microsoft, and yet we haven't really gotten enough weight of the evidence on those monthly charts yet to feel confident that it's a long-term low. There is some evidence, but not quite enough. And this could just be the start of a base building process perhaps, but definitely intrigued by it. Certainly intermediate term, they are working, they're responding to short-term breakouts, so for now we're on board with it.

Adam Turnquist (19:30):

All right. So we'll call it a trade for now. Maybe not quite secular.

Katie Stockton (19:35):

 

Adam Turnquist (19:35):

Accurate, I think is fair, especially when you look at semiconductors versus software. Some big breakdowns there over the last year. Right,

Katie Stockton (19:44):

Right.

Adam Turnquist (19:45):

We'll go back to healthcare real quick. You mentioned some names that are starting to show up in your work, pharma being one of them. What are some of the names that have shown up and what are you seeing there in the healthcare space

Katie Stockton (20:00):

And within healthcare? If you look at the broader proxies like an XLV, what we're seeing is a response to an intermediate term oversold that was generated with the correction. And there's definitely spots of strength and spots of continued weakness. I would put medical devices in that continued weakness category. Biotech has even lost its hold to some degree, but pharma seems to be standing out as a beneficiary of rotations of late. And I think Eli Lilly's probably the best, or most obvious, at least example of that having garnered some momentum. And for every one of those, there's another big name that just seems to be emerging from a correction, so that's intriguing to us where we want to also have a portfolio that's heavy on momentum names, not just these turnarounds and these oversold relative positions, but it is a nice way to balance out a portfolio that may have become tech heavy, which to me, in my conversation seems to be pretty common.

Adam Turnquist (21:06):

I was just gonna ask, how many questions are you getting on healthcare right now? We look at positioning data and you look at the tech, I think we're close to four standard deviations in terms of overweight positioning in tech. And I think healthcare is one of the most under owned, I'm guessing under loved sectors out there. Would you call it a contrarian call even looking at healthcare right now on the long side? Yeah,

Katie Stockton (21:31):

I think you could label it that way and we really are getting no questions about it. That makes it more intriguing to me. But at the same time, something that's just oversold can stay that way, right? So you wanna wait for the momentum shift to be there, and that's finally what we are seeing in the likes of Eli Lilly. So we're encouraged by it. We would expect, a different environment to be more conducive to our performance there. So maybe this is something that gives a hint of a corrective phase occurring over the summer months and those healthcare names should do better in that environment, of course, than the technology names.

Adam Turnquist (22:13):

All right, thanks for that. Let's dive into the one chart that keeps you up at night right now. What scares you from the technical perspective?

Katie Stockton (22:25):

That's a really easy one for me. It's crude oil on a long-term basis, thrown up on a chart with the S&P 500 because yeah, if you look at the past shocks or spikes in crude oil prices, looking at WTI on a generic contract, it's never been a good equity environment. Subsequent to that, we've almost always seen corrective action at a minimum maybe a trading range has ensued or even a bear market cycle and there's a limited sample size. So it doesn't necessarily have direct implications, but it definitely keeps me up at night.

Adam Turnquist (23:10):

Yeah, I can agree there. I'd say oil and interest rates, which are right, much more positively correlated since the start of the Israel-Iran war. Clearly a lot of uncertainty when the Strait of Hormuz opens and at what cost, what's the risk premium that comes out of this embedded in oil think the base case for most people, it's gonna be higher, likely not gonna revert back down to pre-war levels and certainly not feed into inflation and interest rates but we'll switch gears a little bit. Just thinking about risk given that's the chart that keeps you up at night, and we haven't had a material breakdown, although oil is coming off its highs even today we're recording this Tuesday at 12:30 Eastern for a reference point, and oil lower on some optimism around more durable agreement with Iran of ending the war. But when you look at risk as a fund manager, as a strategist, how do you leverage technical analysis to manage that risk?

Katie Stockton (24:15):

Yeah, I almost see technical analysis as a discipline, as a risk management tool. And I think the best way to get there is to have a systematic approach to technical analysis, and that can mean different things for different people. But letting the market just guide your positioning, listening to the market and responding accordingly. And that could even simply be looking at the curvature of a moving average or more complex. And that, of course would be fine too, but to respond instead of predict, right? Because none of us can really predict, but rather we can certainly identify environments that hold more risk by simply tracking the indicators, whether it means an overbought sell signal or downturn or a breakdown below support or a MACD sell signal. All of these things can inform risk. And I think that if you have a way to follow it and take some of the emotional biases that we all have out of it by almost making it more about data and these mathematical indicators, it's a gift from the discipline because it makes things a little bit easier in terms of risk management,

Adam Turnquist (25:35):

Right? And it's objective, I think a lot of people look at technical analysis and put it in the subjective category, but certainly when you're managing risk, you have objective levels. I know I worked about seven years on the sell side, and we had clients that absolutely despised technical analysis, so they were true fundamental bottom up stock pickers. But then when volatility came, all of a sudden my phone was ringing and asking, okay, where are the exit points, where's the support? And all of a sudden they were fans of technical analysis. I'm sure you've had many of those calls yourself.

Katie Stockton (26:10):

Yeah, for sure. I think a lot of folks now are realizing that it can add so much value, just even for a sell discipline, and it will take long-term charts and evaluate them for sell signals, for folks that feel very comfortable with their portfolios that are fundamentally built. But the technicals can be really added value in that kind of situation.

Adam Turnquist (26:34):

All right, thanks. We're running up on time. So we'll close things up. For those of you or our listeners out there that wanna follow your work more closely, where can they find your research?

Katie Stockton (26:47):

The easiest way to access the Fairlead research would be via our website, and we offer free trials, so fairleadstrategies.com and there you'll also find media and social media and can see a lot of our content. Thank you for asking, by the way.

Adam Turnquist (27:06):

All right. And then any final thoughts or themes you think investors should be keeping top of mind right now that we didn't discuss?

Katie Stockton (27:14):

Well, I just would add that there's risk in getting too caught up in the headlines just to trust the moving averages and keep an eye on the momentum behind the semiconductor space in the near term to try to navigate all these conflicting headlines which can be pretty confusing but if you just trust the moving averages and these tools, I think that will add value.

Adam Turnquist (27:42):

All right, so trend lines, overhead lines. I think every technician uses that tagline. We'll leave it there. I think that's a good way to wrap things up and a good message for our listeners. So thank you so much for joining us today. Really appreciate your insight. Great stuff. And we'll be back next week for another episode of LPL Market Signals. Tune in then. Thanks.