CNBC Pro Talks: Katie Stockton on charting success in technical analysis 3/28/24

0:01This is CNBC Pro Talks, where we go one-on-one with Wall Street's top investors, smartest traders, and rising stars. We find out what makes them tick, what makes them money, and how you can follow in their footsteps. Welcome to CNBC Pro Talks. I'm Dominic Chu, and this is a new look for CNBC Pro's flagship interview series. Let's welcome in our first guest for the new era of Pro Talks, widely followed technician Katie Stockton. Welcome to CNBC Pro Talks version 2.0. Now, for those of you who don't know, Katie Stockton is a CNBC contributor. She's also the founder and managing partner of Fairlead Strategies, which is an independent research firm and investment advisor focused primarily on technical analysis.

0:46She's also the portfolio manager for the Fairlead Tactical Sector ETF. The ticker there is T-A-C-K, which currently has just around$214 million in net assets under management. Katie Stockton, thank you so much for joining us here on CNBC Pro Talks. It's good to have you. Of course, Dominic. It's good to be with you for this kickoff. You're the advisor, you run, you direct investment strategy and make decisions for this ETF, this Fairly Tactical Sector Strategy ETF, the ticker T-A-C-K. Let's take us through why start the ETF and what exactly goes into managing that kind of an ETF product and how does it differ from some of the research stuff, execution versus research?

1:34How do you make the bridge between the two? Yeah. So we're the portfolio manager and the sub-advisor for tech, and we launched it in early 22, which of course was a bear market cycle. So it was a great environment in which we could test our model. The impetus for starting that sort of service or launching a product, an investable product, was really just getting to know our own research client base and understanding how they were trying to trade the market. And we found that the sector rotation strategy was really very common, but we felt like the feedback told us that there was limited success with that kind of strategy.

2:15And that came from a couple of things. It was too high maintenance for someone that had a day job, right? So it had focuses elsewhere. It was at times generating too many taxable events. It's really difficult to market time, some of these sectors, if you're focusing short to intermediate term. So we felt a long-term approach is probably best. And that was often hard for a lot of our research subscribers to adhere to. It's when you are so close to the market, right? You're tempted, I think, to make decisions that are higher frequency, but we feel that there's a way to just have a long-term view.

2:56And I'd say that's the biggest difference between our product and some of our research would be that we are very long-term and focused in tech. We are using month-end closing data. So we're using monthly bar charts, monthly indicators. And in doing so, we're eliminating a lot of the noise that admittedly we get caught up in our research. We have a daily research report. So we're very in touch with the short-term price action for the top-down inputs that we discussed. So there is a long-term element to it. And that's because we believe that that's the best way to invest. We believe in long-term investing.

3:33And you don't need to reposition through every corrective phase. But what you do need to do in order to succeed, in my opinion, is to limit the drawdowns, the major drawdowns like 2022 or like a 2008. Those are the bear market cycles that we are trying to avoid by having an asset allocation element to tack, not just a sector rotation element. So we have that dual mandate of participating in the equity market when it is firing on all cylinders and finding the leading sectors and the sectors with the best long-term momentum, but also the ability to build some risk off exposure through other asset classes.

4:19You know, Katie, it's interesting because as you're talking about the thought process and the philosophic elements behind TAC, I can't help think about this idea that many of those indicators, lessons, or constructs that you're talking about are ones that you can apply to various parts of not just the markets, but of life overall, careers, everything else. It's about risk management. It's about knowing when things are changing, when trends are evolving or when they're on the downslope, everything like that. I wonder if you could take us through maybe a little bit about just some of the lessons that you've taken away from a career in technical analysis and maybe how it's permeated itself, those lessons through not just your professional life, but also other aspects of your life as well.

5:04Yeah, for sure. I mean, I think what I've learned over time is that the long term approach is best, right? not to get too caught up in some of the noise. That's been one takeaway. And of course, that's manifested itself in our investable product. I've also learned that a systematic approach tends to be the best. And that doesn't necessarily have to come from technical analysis. But in approaching markets, it's so easy to let our biases get in the way. But if you can get some sort of indicators or metrics on your side that you're repeatedly coming back to and adhering to, you know, essentially having a discipline, I think you can find real benefit in that.

5:48And the methodology can be completely different than the next person's. But to have a methodology, to have a discipline, I think that's really essential. Or you end up having, you know, it can be somewhat careless, right, just to consume all sorts of information from different sources and to make decisions on the fly. I think there's risk to that. So I'd rather have this more disciplined approach. And that's certainly something that I've learned as I've gone along. We are all about identifying investable themes that have good momentum, but we're doing it from an approach where we're very sort of with attention to risk management.

6:28Right. And I would argue that that's how I sort of live my life, too, is sort of conservative in the way I run my business, as an example. You know, these are it's just my personality, I think, and how I approach things. But, you know, if anything, it's like I'd rather miss an opportunity than put a lot of money at risk. Right. And so we always have a level in mind, as an example, on a chart below which we are uncomfortable owning that position. Right. So we always have, in a way, a stop loss. And that can go not just for investing, but in a way for other decisions, right, personal decisions. What's interesting, you've done this a lot over the years.

7:09I've known you for the better part of a decade and a half plus now, almost two decades, just either tracking your work from my career on Wall Street and certainly as a journalist as well. One of the things that's interesting about the way that we're talking about this is when you feature on CNBC Air and we talk about these things, oftentimes we look at the lessons and what we can take away from the charts. I wonder what you can tell us about how being able to explain this in a more in-depth format can take some of those lessons and translate them into usable ones for our audience and subscribers here on CNBC Pro.

7:48Yeah, I mean, listen, I think it can be really simple. In fact, technical analysis does not need to be complicated at all. My advice is often for folks on their screen, on their laptop or their desktop to dedicate some space to a chart. And it's really very simple. the chart can have a lot of indicators like ours do, or they can just have a moving average. It's whatever that person is comfortable with and whatever visually appeals to them. And in a way, just having that visual element to your investing decisions, I think adds value. And it may not seem like a systematic approach, but if you're constantly checking the charts, in a way that's getting to that place where it becomes part of your process.

8:37So that's what I always recommend as a place to start. We also have, as technical analysts, say a professional designation called Chartered Market Technician or CMT. It's like a CFA essentially, but for technical analysts. And in studying for those CMT exams, you get a good swath of technical analysis education. So I always recommend folks look into that as well as a way to learn about the different tools that are at our disposal as technicians and really just see what resonates with them. because there's so many things that I don't do, quite frankly, in the world of technical analysis that add lots of value and may appeal to a certain person.

9:24I don't use Elliott Waves as one example, but I do use something called the cloud model. You've probably heard me talk about it quite a lot. So we all have our own specific tools, I'd say, that appeal to us. So I think it's a matter of having that sort of, you know, read, go ahead and read the textbook, right? Just so you know, what, what's at your disposal. Okay. And one kind of last final point on the story element side of things. Can you talk to us about, I mean, you, you watch a lot of different stuff. You see a lot of different things in the marketplace right now. What is the most intriguing storyline to you or theme or, or investing philosophy that's kind of working its way through the markets right now, as we speak?

10:06Well, we've seen technology as a sector gain this massive footprint in the S &P 500. So it's about 30 % of the S &P 500 is waiting. So I think that, and of course, AI would fall within that broader technology theme. It's all about the technology sector right now. And it also happens to be the sector in which we receive the most amount of questions, right? We feel like the interest is mostly there in the technology sector. So we are acknowledging how important that sector is to the market. We rely on it as a sense of whether there's risk on or risk off. The semiconductor stocks, for example, can tend to exhibit upside leadership in strong tapes.

10:53So when we see them pull back, well, then that can be informational in the same that we might look at any kind of higher beta areas of the market, like a Bitcoin chart, for example. So we've really been adherent to scrutinizing the relative performance of technology and the momentum behind technology, both as a sector and then the subsectors within. So that's been essential to our process. We, in our ETF, we equal weight the sectors. So in a strong tape, we're going to actually underweight the technology sector by default. So we always tell people to have tech as a core position, but then to supplement it with individual technology stock positions and a strong tape.

11:37So that's been something that we spent a lot of time on recently. And in a way, we'd like to see the tech sector's footprint shrink a little bit, but it doesn't seem to be going that direction. CNBC Pro Talks is a monthly interview series that's part of CNBC's premium subscription service, CNBC Pro. To hear the full ProTalk interview, including specific stock picks and investment strategies, listeners can subscribe to CNBC Pro at cnbc.com slash ProTalks. That's also where subscribers can submit questions for upcoming guests, or Pro members can email those questions to askprotalks at cnbc.com.