Will Earnings Be a Catalyst for Bulls?

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1:48Will earnings provide a catalyst for the stock bulls? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Katie Stockton, founder and managing partner of Fairlead Strategies. Hi, Katie. Welcome back. Hi, Maggie. Good to be back with you. Same here. So I want to dive right in with equities because, you know, we saw them trading for most of the day in the red. They managed to turn it around late in the session, which just ended, and close in the green. But, you know, for most of the day, they were kind of dragging. But I heard a lot of analysts making the bull case today. You know, Bank of America noting that the earnings season is off to its best start in a decade.

2:26Fundshrath Tomley, who granted is kind of a permaball, but he said it's beginning to feel like a bull market. I don't know. How are you feeling about the S &P 500, Katie, where we're sitting? What are your thoughts? You know, I look at strictly technicals, right? So for me, it's almost math. And I'm looking at technical indicators. I'm looking at key levels. And until those indicators sort of give me the weight of the evidence that we have a bullish reversal, I'm not quite there yet. But we're actually pretty close to it. So it's interesting. There's some very key levels that are pretty much in play right now for the major indices.

3:01And some of the market internals are getting more conducive. But at the same time, we have some extremes that would suggest that it won't continue. So we want to be really respectful of the indicators when we feel like we have somewhat of an emotionally charged tape. And I think that's part and parcel with all of the news out there, the fact that now we have earnings season upon us and folks are having to digest that news, of which I think some could speculate won't be great news for those individual stocks collectively, especially following a nice up move off of the mid-March low. We've had good short-term upside momentum.

3:40And now the major indices are at this proving ground. We are watching as our key level for the S &P 500. It's about 4155. In fact, I can show you if I can share. Yeah, I was just going to ask you, if we're at a key point, what should we be watching? Yeah, so I would say that this 4155 level, it's not a level that necessarily would be widely followed. Hopefully you can see my screen here. with the arrow pointing. Notice there's a shaded area on the chart, and that shaded area represents the cloud model. It's also called Ichimoku. It's a great way to understand the prevailing trend and then also support and resistance levels.

4:20You can see based on the cloud itself and the trajectory and the fact that price is below it, it's a downtrend still based on this model, but it's also very close at current levels. So what we would need to see to reverse the downtrend based on this one model in particular would be consecutive weekly closes above that 41.55 level. So that's really what we've been looking for to signal a breakout. Otherwise, I think we can say that the market has really been range bound. So people feel really good when you're getting the short term upside, but they also feel really bad when you're getting the short term downside.

4:54And the end result has really overall been somewhat neutral from an intermediate term perspective. Now, are you feeling, I love the idea of a proving ground, by the way. I mean, that seems very appropriate. Is this a short-term situation and a long-term situation? Or because we're in a proving ground, you're really only wanting to think about the short-term here because we may see a trend change? Yeah, the trend change would actually be more intermediate to long-term in nature. We believe and have believed all along that this is still a secular bull market going back to the 0-9 lows. That's actually dictated by the monthly cloud model, which has always been pointing higher.

5:35But that monthly cloud is starting to kind of not roll over, but certainly neutralize in terms of its slope. So if we were to see a breakout, we would say, well, it would bode well for the next few months for the S &P 500 without really actually making any comment on the short term. And that can be frustrating because you want to typically act right away in a breakout. But it's often more prudent to wait for the first pullback after that breakout to add exposure because you can pick up some of those securities a little bit lower, perhaps even than the breakout point. So I wouldn't necessarily feel the need to chase a breakout, but it would certainly improve the posture of the market for the next few months.

6:17We have an environment that is sort of mixed in terms of the macro takeaways. We have treasury yields that look like they should correct more. So that means sideways to lower in the coming months. But beyond that, we think that the sort of new secular shift that we've seen in treasury yields will continue and resume. So it's a more challenging environment for equities in particular when you keep that in mind. And I think it's not accidental that we're seeing rotation in the likes of gold with that, you know, sort of shift in yields that we've seen. Yeah. I want to dive into some of those other asset classes.

6:54But first, before we get there, it's one of the things we heard over and over again in this sort of transition period. A lot of people being, you know, talking about being stuck in the chop, you know, and hard to figure out what comes next, knowing that maybe something's going to give. But was, you know, listen, keep your powder dry, stay in cash. Is that still something you favor in this environment based on what the charts are telling you? What should investors do against this backdrop? I think where we see positive catalysts, we can act on them. So you do want to have some cash, of course, available to do that.

7:28And for us as technicians, positive catalysts can come in the form of breakouts. They can come in the form of momentum buy signals. We use the MACD indicator, very popular tool for that. So momentum sort of signals or crossovers in this MACD indicator can be a good catalyst as well. We'll look for oversold upturns to trigger entry points. But we haven't seen a whole lot of those collectively, at least intermediate term, not yet at least. So we are generally in this environment still comfortable with more risk-off-leaning exposure. And that wouldn't just include cash in our work. It would also include things like treasuries and gold.

8:08So we do feel like there's alternatives right now that are a little bit more convincing in terms of their intermediate term prospects. But if the market proves itself and breaks out and we see more of these positive catalysts, we will want to be ready to put some more money to work. I think this range that we've seen has created the max amount of frustration because a range-bound environment doesn't really allow you to make money over any duration on the long or short side. You have to really be forced to become more short-term, which is, of course, more difficult in terms of market timing. Whereas a trending take, whether it's up or down, is actually a little bit easier to navigate typically because at least you can assert more of a directional position.

8:53Yeah, you hit the nail on the head. Frustration is certainly what a lot of people are feeling right now. Not only are we range bound, but we have a really huge range of opinions, right? I mean, we have people that I mentioned like Tom Lee arguing the bull case. You have plenty of other people who are still really concerned, really concerned about the threat of recession. So Raul recently sat down with Michael Howell, CEO of Cross Border Capital. A lot of our members were asking for the two of them to have an in-depth conversation. And they talked about their outlook. Michael, of course, tracks liquidity.

9:27And he sort of expressed and gave some reason why he thinks the downturn in the economy is going to be manageable. Let's have a listen to that clip. What you're seeing right now is that equities are climbing a wall of worry. OK, but that's always the case, is it not? People are trying to project, you know, the next recession, how deep it's going to be, etc., etc. But the equity markets seem to be looking through that. Now, what I would say is that all the work that we do on fixed income and we, you know, from our analysis, we look at liquidity. We see how that affects fixed income. Fixed income markets, you know, they don't lie very much.

10:04There's a lot of truth in what fixed income markets are really saying at any one time. And what the fixed income markets in my estimation are telling us is there is a bottom in the US economy around about the mid-year. I'm not saying the economy avoids a recession. It's probably going to be quite shallow in my view. One of the reasons I think it's shallow is that if you look at the yield curve, which everyone now quotes as a sort of the signpost to deep recession, the yield curve is hugely biased by these negative term premiums. Now, the term premium has nothing to do with economic expectations or rate expectations.

10:41It's to do with a shortage of collateral. So what they're really telling us is more about potential financial fragility than real economic fragility. And so in my view, you're going to get this shallow bottom in the economy around about the middle of the year. And if that's correct, stock markets, in my experience, tend to discount, what, about six months ahead. So the rally we've been seeing since the beginning of the year seems pretty much on track as far as I can see. And that full conversation is available on our website. It was a fantastic discussion about the role of liquidity and how it's working.

11:20I encourage you to check it out. If you're not a member, click the QR code or hit the link in the chat to find out how you can join. A real masterclass from those two. So, Katie, where are we with market sentiment? I mean, Raul and Michael both feeling, I think it's fair to say, bullish based on what they're seeing with liquidity or at least having feeling like equities have probably put that long in October. But what is the market? What is market sentiment, the broader market sentiment? It's actually really interesting because just like the major indices, we have sentiment at a bit of a critical juncture on the chart.

11:53So I think this week, in fact, will be very telling as it pertains to market sentiment, which we measure multiple ways. You can always take an investor poll for one. So people might be saying right now, well, sentiment seems so bearish out there. Well, it's not really scientific, right? So we like to hear about the polls. But we like to more than just to know what people are thinking. We like to know what they're doing. And you can see that in some of the transactional gauges of market sentiment. And those show that bullishness is actually running quite high. If you look at something like the fear and greed index, It's not at an overbought or sort of overly bullish extreme, but it's getting close to that level.

12:34And that's just been instilled by, I'd say, primarily the action in the mega caps, more so even than the major indices, which remain below their sort of early Feb highs. And then, you know, to me, the VIX, the volatility index is a really great transactional gauge of sentiment that is at very depressed levels below, I think, 17 when I last looked at it. And this is the key juncture that we're referencing in our work, and we've been referencing it for a long time to say that if support for the VIX is taken out decisively, which it has the potential to do literally in the coming days, that would suggest that there's been a pretty major shift in market sentiment, meaning that we've gone from what we consider to have been like a high volatility regime based on the VIX, where there were sort of higher highs and higher lows and at an elevated support level.

13:25Whereas for a lower volatility regime, we'd expect that support level to be even south of 15, perhaps, maybe even closer to 11 or 12. So if we see a decisive breakdown as of the VIX action this week, we would suggest that that's actually a market bullish development because the VIX holds an inverse correlation to the S &P 500, which, as you just saw, was challenging some resistance in line. Hey, everyone, we're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

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15:04That is really interesting. So you mentioned some of that mega cap tech, right? And not only were people feeling bullish, there's good reason. If you were holding some of those stocks, they had tremendous gain. If you look at what NVIDIA did, for example, or some of the other names. So if you're looking at a sector, I know you sort of have a grid where you look at sectors and you have an overweight, underweight on them or neutral status, what sectors look attractive to you right here? Are you overweight anything? Yeah, so in our ETF, we hold still the energy sector. So if I had to say positioning, I would refer to that.

15:44And that's very simply because the energy sector was the only one. I'm going to share my screen here. You can bear with me. it was the only sector that maintained its long-term uptrend. And yet, you know, there are sectors that you can see relative performance likely to come from. I hope you can see this. Yeah, we can. This is the S &P 500 sectors in what we call a relative rotation graph. This is a sort of a third-party service that we subscribe to. And you'll notice there's rotations. And if we were to animate this chart, it would move in a clockwise manner. And when something's pointing up and to the right, that tends to reflect our performance, right?

16:27So you see communication services, consumer discretionary, and technology there. This is a long-term view. It's showing six months of trailing history. So those are the best position sectors here for, I'd say, between now and year-end are the implications. However, if we take that and we drill it down into a weekly view, meaning more of like an intermediate, short to intermediate term view, you'll see that it changes in a lot. It changes a lot where you actually have consumer staples, utilities, healthcare as having those similar and best trajectories. So to us, that's an issue. I mean, that reflects potential for defensive sectors to outperform the S &P 500 over the next, I'd say, six to eight weeks.

17:15That's so interesting. Interesting. If we look at that chart, Katie, I love this chart. I don't think we've seen, we've pulled this up when we've spoken before. What's happening, one has to ask with the blue and green. It looks like they're heading in the wrong direction. Yeah, it's based on where they've come from, how they're colored. So anything that had been moving to the right had outperformed, and this is the crosshairs represents the S &P 500. So if you think about the x-axis as being relative performance and the y-axis as being the momentum of that relative performance, Where you have the biggest opportunity is when you have the upward trajectory.

17:50So you're already kind of moving this way and you move into this improving quadrant and the colors will ultimately change from purple and blue to green. And, you know, where you want to be still underexposed, and this is within intermediate term time horizon in our work, would be what you're seeing down here. So financials and real estate, especially, even to a lesser degree, material is industrial. Energy has taken a wrong turn over the past week, somewhat surprisingly. But you can see how deeply oversold it could be considered. So we have these rotations that we can take advantage of. But we also had to really have good attention to the multiple timeframes because you saw the six-month view is sending a much different message than this sort of six - to eight-week view.

18:34That's so interesting. And I think that really is a good sort of, you know, little slice of why it's so difficult for people right now, because you have that big difference once you change that time frame. And we always talk here and in the academy and a lot of the tutorials we have, we always talk about identifying your time frame whenever you're talking about something as being so critically important. So I'm curious with financials. Of course, we know what we just went through with the regional banks. We're heading into a big earnings period. We've got some really big names coming out. does that just look like something that you really want to be underway right now?

19:08You know, the financial sector, it's so interesting because it actually broke down in relative terms before we got the breakdown in the regional bank stock. So we saw that relative performance deteriorate ahead of the breakdowns, which is why in part we focus on relative performance so much, because it can actually get this leading indication of what's about to happen in absolute terms. We, of course, saw significant underperformance on the back of that relative and absolute breakdown. Now, to the extent that the financials can be considered oversold, they're oversold in relative terms, but they're not really showing much of a reaction to that.

19:47And so that for that reason, we're just happier being on the sidelines. So we are underweight the sector. If we were to see some reaction to oversold, there might be a trade there. You need just a phase of short term relative performance to take advantage of. But I would say given how deeply oversold they are in relative terms and the lack of a reaction on the back of that reading, it just tells us to respect the downdraft for what it is and wait for at least some stabilization to suggest that they're ready to outperform. I've got a school that we're having a very funny and very smart as usual discussion on our chat.

20:25We have a lot more technicians in the room, Katie, than I would have imagined. And someone asking, I think Ralph brought it up, about a technical analyst noted the NASDAQ generated a COPAC curve buy signal at the end of March. Is that an indicator you follow? If so, can you discuss it a bit? And then a bunch of other viewers came on and said it's not very reliable or it tends to signal late. Is this something that you use in your work, Katie? It's not. I don't use that indicator, but it doesn't mean it doesn't work. There's just so many indicators out there that we can reference. And I think that as long as it's not something that's sensationalized, something perhaps like the Hindenburg-Omen that really doesn't have a great sample size, there's usually some validity to it.

21:13But I always defer to momentum above all. I think that the momentum gauges are the best at keeping us on the right side of the prevailing trends. Again, Maggie, we get into that challenge of making sure that the attention is paid across timeframes because the trends can be different over different timeframes. But from a long-term perspective, we've seen momentum go from pretty strongly to the downside last year to what I'd say is much less to the downside, but it's still not yet to the upside. So we don't have that affirmation from the long-term momentum gauges yet that the market has seen a turnaround.

21:51We're reading the same sort of anecdotal evidence. I think there was another sort of flurry of chatter around something about the, if we're above the December low by this time in the year, that tends to be bullish. Those phenomenon, you know, as long as they have some statistical significance, I certainly make a note of them. But to me, it's not, it's somewhat high risk to invest just on a seasonal influence because there are times at which those seasonal influences break up and they can do so pretty dramatically. So that's why I think momentum is what I gravitate towards. We have someone asking about health care as well.

22:29They're asking any subsector of health care that you get in or at a position. I'm not sure that you look at it at that level, but I know that health care is a sector I think that you like, right? Are you overweight? Are you recommending overweight health care? We are overweight healthcare, and not with a long-term time horizon, but with that intermediate-term time horizon that was supported by those rotational graphs that we just looked at. We just featured the healthcare sector. We rotate each sector through our sector report once a week, and we just completed the healthcare sector. And we feel pretty confident that there are some opportunities there.

23:04Our bottom-up work showed far more opportunities that we felt like had those positive catalysts in the form of breakouts or MACD buy signals. We discovered quite a few of those, and it's also a more defensive-leading sector. So with the rotations favoring that, we felt like we have one of really the best sectors to take advantage of over the next maybe six to eight weeks or so. On the group level, I think it was sort of the healthcare services that were looking most compelling to us. We also had some great action in the pharmaceuticals, Eli Lilly for one, but they are looking a little bit tired from a short-term perspective.

23:46So I'd be looking for sort of emerging signals, stocks that are just starting to advance from support or from oversold territory. And I just want to round out, William asking, where do we hide? Before we move into other asset classes, utilities is the other that you have an overweight on, correct? Yes, we are overweight utilities. And again, with that same time price. And so really more of a six to eight week type of view as opposed to a six to eight month type of view. So we are comfortable with that sector in relative terms, in part to take advantage of the relatively oversold condition, which also affected energy, of course.

24:22But in terms of where to hide longer term until the market really is convincingly out of this bear market cycle, which could happen quickly, but it could, of course, be delayed by that defensive sector rotation and a pullback. So for now, we are comfortable hiding in other asset classes. I think gold is a great example of that. Gold, we suspect, will be at new all-time highs this year with good momentum and just a brand new long-term momentum signal there, buy signal. If you're following the monthly MACD, that's what I would encourage you to look at because that has turned after being sort of negative or deteriorating for about two years.

25:02I'll have to give a plug for my ETF. I was just going to ask you. You mentioned it before. Yeah. What is it? Tell us how to find it. The ticker is TAC or T-A-C-K. And we feel it's a great place to hide as well. And we say that because it has the ability to move more risk off and the market dictates it in terms of long-term momentum. So it's a long-term strategy, conservative, but designed to avoid these big down drafts that we have. And it currently has positions not only in energy, but it has a gold position, a position in short-term treasuries and also long-term treasuries, which if you look at their charts in relative terms, they certainly improved this year versus equities.

25:44and they appear to be in at least sort of treating ranges on improved momentum that we think will stick with them for a few months and then perhaps we'll move into more of a risk-on position. When you're talking about energy, Katie, are we talking about broadly? Are we focused on oil, not gas? Is it spread across the energy complex? How are you thinking about that? Yeah, right now it is spread across the complex, but it isn't always that way. You've seen probably a chart of natural gas futures, and boy, I mean, they've really been under pressure and I think sub two as of late. So that downtrend has largely been something that we would have wanted to avoid, but then we got these countertrend signals that are short to intermediate term in nature behind natural gas.