64: How to Hedge Your Portfolio (TACK) w/ Katie Stockton

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0:35I just give my stylist my size, style, and budget preferences. I order boxes when I want and how I want. No subscription required. And he sends just for me pieces, plus outfit recommendations and styling tips. I keep what works and send back the rest. It's so easy. Make style easy. Get started today at stitchfix.com slash Spotify. That's stitchfix.com slash Spotify. All right, everyone. This episode, we're going to go a little deeper than normal. We've got Katie Stockton on here to go through technical analysis. So before you think about clicking away, because it might be too deep or too technical, please, please, please get out that notebook.

1:15Remember, I always say, take notes and take action. Well, this is the episode where you can really learn a ton in a short period of time. And trust me, even I learned something today after 30 years of doing this. So this is a great episode for you to really step up your information and the learning curve. So follow along. And don't forget, if you missed the direct indexing webinar that we hosted with Freck, you can still watch the replay. There's going to be a link in the show notes below. It is right there. Go check it out. It was a wonderful webinar. We broke down all things direct indexing, tax loss harvesting.

1:50It was literally the best webinar. Cannot wait to have another one with them here soon. So if you missed that, go watch the replay. It's completely free. Hey, everyone, and welcome back to the Rich Habits Podcast, a top 10 business podcast on Spotify. My name is Austin Hankwitz, and I'm joined by my co-host, Robert Croak. Robert is a seasoned entrepreneur in his 50s with lifetime revenues of over$300 million, and I'm an entrepreneur in my late 20s with a background in finance and economics. Since quitting my full-time job in corporate finance a few years ago, I've built a seven-figure media business and actively advise some of the most well-known fintech companies around the world.

2:26Now, as the show name might suggest, every episode, we talk about rich habits as they relate to business, finance, and mindset. However, we try and bring you two unique perspectives, one from an industry veteran, which is Robert, and the other myself, someone who's still in the process of building wealth and figuring it all out. Robert, we're excited for this episode. We have a special guest joining us. So with that being said, what are we going to be talking about in this episode? Yes, in this episode of the Rich Habits Podcast, we're joined by none other than Katie Stockton. You might recognize her if you're a frequent watcher of CNBC or Yahoo Finance.

3:01She is what Austin and I would call and consider an expert on technical analysis. So we'll let her explain exactly what that is in a moment. But before that, we wanna be very clear that you should not be buying or selling stocks and indices just based on technical analysis alone. But it is absolutely an important part of deciding what investments to make. We're all investors and have investment theses for our ideas, and Katie is here to help you better understand when it might be a good idea or a bad idea to buy or sell a stock that you may love. Katie, we are so happy you're here. We can't wait to dive into technical analysis.

3:41I am still someone who's learning it. I've actually become a lot more excited about it, as you've probably seen on my newsletter. But one, who the heck are you? And two, how are you so good at this? Well, thanks, Austin. Thanks, Robert. I'm so glad to join you both. And I love the title of the podcast, Rich Habits. I'd like to try to contribute to that, of course. As mentioned, my discipline is technical analysis. So it's very specific. It's a narrow expertise. And it is incredibly valuable pertaining to investing and trading. So we focus all of our efforts there, but we see technical analysis as like the ultimate complementary discipline.

4:19So whatever you're already doing in terms of fundamental research, macro analysis, political inputs, things of that nature. I think it's a great add-on to that. So hopefully we can add some value on that front today. My firm is called Fairlead Strategies. I founded it in 2018. So I too am an entrepreneur like you, Austin, and you, Robert. So we've built it over the years initially as an independent research provider. So we provide research to our clients and then also as an ETF portfolio manager exchange traded fund. I love it. That is a lot and I can't wait to dive in. So for the people listening that are like, wait a second, what the heck is technical analysis?

5:00Can you give us the tell me like I'm five years old breakdown of what technical analysis is? You know, in its simplest form, I would say that technical analysis is a study of price trends. We all know that securities have prices, and when they're trending higher, that's when we want to be invested, and of course, vice versa. So it's a great risk management tool in that it can help not only identify those trends, but also whether those trends have momentum. So the measure of momentum and other factors, like whether something's overbought or overdone on the upside or oversold or overdone on the downside.

5:35plus relative strength analysis. We like to look at things relative to one another to find opportunities and also manage risk and identify shifts on the macro front. And all of these price trends are really a manifestation of supply and demand. And that supply and demand is for the security. It's not even just for an individual company, right? We have the sort of, I call it them, top-down influences from the equity market for one, meaning that we really need to have an understanding of the broader market as we're investing in individual companies via their stocks. I love it. That makes a ton of sense.

6:12And Robert and I, well, me very specifically, I think Robert does this as well though, is whenever I have a stock idea or whenever I'm looking to buy a new ETF or a new something or add it to my portfolio, it's like, okay, I have conviction. I'm excited about this. I know I want to own it. But now it's like, what's the price doing? Has it gone up a whole lot over the last two weeks? Am I maybe buying the top? Is it really oversold? Is there very low sentiment about what's going on with the price? And so that's sort of where technical analysis can begin to add some value to our portfolios is we can take a step back and say, all right, is this price a good price to get in at as we holistically look at recent price action?

6:48So with that being said, I think, Robert, let's jump into this interview. I'm ready to learn more and I'll let you kick us off. Yeah. I think one of the important questions for me to understand coming from you today, Katie, is, is technical analysis as important today as it was 20 years ago? As we discussed earlier on, you see so much activity now that is based on social media, news cycles, hype cycles. There's so much going on in the markets that I believe there is just a lot more to consider when investing into a stock and using technical analysis. And I know that back in my early days, let's call it 25, 30 years ago when I was day trading and all I did was individual stocks.

7:29Technical analysis was everything. Tell us, all of the listeners, what your thoughts are in today's market of the importance of technical analysis as an overall perspective of investing in a stock. Yeah, I think you sort of hit it when you said there's a lot going on in the markets. And that's why I would argue that technical analysis is more important even now than it was 20 years ago. We see so much volatility both to the upside and the downside in this market. So I think technical analysis and the charts that are a part of it are the essential tools in navigating that volatility. So we want to make sure that we're not buying a stock or security, you know, into a breakdown as one example.

8:12There's ways to understand that just the market timing is not right for a position. So we concern ourselves a lot with that market timing element. And Austin, I know you've gotten to know the charts to some degree. my hope is that everybody on this call, you know, can say, well, I can't invest without looking at a chart. I just think it is that important where they need to understand, okay, is this a counter trend position that I'm taking? And they're in its higher risk. Because if you think about it, the market should reward the good stocks, the good securities for their fundamentals, right? So those good companies should theoretically be trending higher.

8:51If they're not, well, well, maybe that's a message from the market. And it's a manifestation of market sentiment. And that certainly hasn't changed in the past 20 plus years since I got started. So a little bit, can we elaborate about price analysis, overbought, oversold, sentiment analysis? Give us a little bit of breakdown of what those terms mean to the everyday investor that's following along the Rich Habits podcast and really just learning on how to do all of this. Because one thing that Austin and I always preach, and I'd love to hear your thoughts on it, is for most people getting started, they shouldn't even be buying individual stocks.

9:29They should be buying the S &P 500, buying QQQ and the NASDAQ, and buying these products that they don't have to select these individual stocks. So talk about some of the different parts of this and what that means in each individual term. Of course, right. So for a technician, some of them are going to be just looking at price trends, just bar charts, right? Others might be looking at moving averages of price to look at sort of a smooth version of the trend. Others, like myself, will be looking at technical indicators. And while a lot of them have fancy names, they're really very accessible, meaning that once you do a little bit of homework and pull it up on a screen with a chart, you'll start to get to know these indicators really very well.

10:15The design of the indicators is to take out some of the sort of biases that we all have as we approach different investments. We come into things, if we spend a lot of time researching them with, of course, a bias that we want to own that. We spend a good amount of time researching that company or what have you. And we look at that chart and say, I'm going to make something good out of this, whether it is good or not. So the indicators in a way keep us honest as investors and as humans by saying, okay, well, in this environment, sure, go ahead and take your position, but momentum is working against you, right?

10:50So negative momentum, these binary takeaways that the indicators that we have give us are so valuable. We have momentum gauges. So those would be things that are often moving average based. We have one called the MACD or moving average convergence divergency, a fancy name, but but it's really just derived from moving average price. And it will give you actual buy and sell signals and crossovers that indicate whether something is shifting in terms of momentum. So that's really one great tool that people can access for free, really anywhere online. So it's a very common technical indicator. We also have overbought oversold metrics, and those are typically oscillators.

11:28And these oscillators will show you if something's getting a little bit overdone potentially. And then when you have a downtick in momentum, if something's so-called overbought, well then, you know, that's something that maybe is a good sell indication. So that overbought condition in and of itself isn't necessarily bad, but when you see the downtick in momentum, it becomes a more vulnerable type of setup. And I think we all struggle, of course, with this sell discipline. And so great added value on that front with the overbought or sold metrics. And we hear a lot of, I'd say, references to overbought and oversold in the media, but it is measurable.

12:03When I say overbought, I'm talking about a stochastic oscillator above 80%. So it is something that we're not just kind of pulling out of thin air, we're seeing this security is actually overbought. And these things, as you can see, are mathematically based. So they are programmable too, and they can help you approach markets more systematically. With the sort of next category, I would say of indicators, I would put that as relative strength metrics. So we're looking at price to price ratios, very simple line charts with price to price ratios. We're also looking at something called relative rotation graphs.

12:36Those are sort of a normalized view of rotations in underlying sectors and areas of the market. All of these things taken together can be a valuable methodology and get you to a place where you're making decisions that are informed, that have less of your biases sort of baked in there and with less emotions. Wow. Okay. That's awesome. I think what I heard from that, that can really help everyone listening right now, especially if it's a single stock or, you know, let's talk about Nvidia. That's a really good example because Robert's been talking about Nvidia for a while, right? Whenever someone is looking to buy a single stock and Nvidia is a great example where it's up, it's ran a whole lot and you're like, dang, is it too late?

13:20Did I miss the boat? Or you bought maybe early and it ran up, you're like, is it time to sell? So you're saying that technical analysis can be this tool that can help people who are existing investors figure out, maybe it's time to get out or take some profits. Or two, people who want to become investors saying, maybe it's a little too overbought right now. I should give it some time to take a rest. And maybe it will come back down 5%, 10%, 15%, whatever that might look like. Is that what I'm hearing about technical analysis? That's a great way to think about it, especially pertaining to individual stock investing.

13:49As Robert mentioned, that is a higher risk approach to markets when you're doing this sort of bottom-up investing without a good handle on the top-down input. So with that, you, of course, want to have the momentum on your side. You want to make sure that you're not buying into a parabolic up move that's tiring out. You want to make sure that there is support, which is a potential sort of area of buying pressure, not too far from the current level. So there's definitely some inputs that will help you time that entry and also manage risk, have almost like a defined stop loss metric too, perhaps from the charts.

14:25So I think it's essential for individual stock investing. I'll give you a very simple metric that everybody can watch, which would be the 20-day moving average. It's a very tight moving average to price movement, but we have a lot of steep uptrends like NVIDIA. And in order to navigate these uptrends, just a simple moving average like the 20-day can be added value in that it will tell you when momentum has shifted enough to maybe warrant some repositioning. It depends on your time horizon. If you're super long-term, well, you may be very willing to watch a pullback in NVIDIA just with the thought that, well, in a year, two years, three years, it will be higher.

15:04So I'm not going to worry too much about that. But if you're really attuned to those short-term swings, well, then you may take that sort of reversal in the 20-day as an indication that risk is heightened to the downside, minimize your exposure throughout that potential downdraft, and have a way to get back in using the charts as well. So it's just a matter of navigating different swings, right? Navigating the volatility that is inherent to markets these days. And Robert, to your earlier point about investing top-down, well, maybe it's not as exciting as NVIDIA, but it's diversification. There's a reason why financial advisors focus on diversification, right?

15:43We know that it helps give you a way to manage risk and get exposure to different, not only stocks, but asset classes can be essential to not just participating in a full market cycle, but also managing risk through that environment because it all feels great when things are all going up. But we've all lived through bear market cycles because 2022 was exactly that. So we need to have some comfort level of being diversified. Now, Katie, you said the 20-day moving average is something everyone can go look at. Where? Where do they find that, right? We're all about no gatekeeping, making sure everyone has their resources.

16:20What websites? What platform? Where do they find this information? Yeah, you know what? A lot of platforms, fintech platforms and wherever you hold your account will often have charts. So I would start there with your existing account and see if they have some kind of charting service or offering because many of them have actually very robust charting services. And I would, I guess, encourage investors or traders to have little, I guess, real estate on their screen dedicated to a chart. And it doesn't have to be a complex chart. There's a big sort of mantra in technical analysis to keep it simple.

16:57The goal is to eliminate our emotions in that. So to have that chart, and then there are websites, tradingview.com, stockcharts.com, that have either free or very low priced services that give you access to these technical indicators. You don't have to have an institutional level program like a Bloomberg, for example, to arrive at these indicators, which is really a gift because that wasn't the case many years ago. So I was hand charting point and figure charts at the beginning. Robert, yes, I knew that that was with you. We don't have to do that anymore. And that gives us so much more capacity to consider different asset classes and investments.

17:38Yeah. And I wanted to rally this point before we move on. This really kind of highlights and illustrates all of the options you have when you're beginning your investment journey towards building wealth. But also I think kind of reinforces what Austin and I always tell people. And that is, in my opinion, people should start out with the basics. We always talk about people building their base, get to that first 100K maybe before they start investing in individual stocks. Because so many people believe when they get that first 5 grand or 10 grand or 20 grand and they're ready to start investing, they should immediately go to individual stocks and buying a real estate property.

18:15And I think that is a bad strategy starting out. You should get your bases covered, get those index funds, get yourself making some money before you do these other things, unless you have proper training to get there. I've been trading individual stocks for decades, but I also know what I'm doing. And it's just something that we like to just explain to people. Yes, it sounds way more fun to go all in with your five or 10 grand on NVIDIA and maybe, you know, AMD and Tesla and all that. But then when there's a 40 % correction, people get scared and go, oh, oh, investing isn't for me. And then they get out and they sit on the sidelines sometimes for decades because they got burned one time.

18:54So that's why this is a really great episode for our listeners to kind of understand the cadence of the journey to know how to build wealth the right way rather than taking big YOLO shots in the beginning. I love it. And speaking of sort of having a measured approach to investing, Katie, you guys have an ETF called TAC. T-A-C-K is the ticker. So can you explain what TAC is, the strategy around it, how you built it, and who the target investor is, right? The person who wants to add TAC to their portfolio? Right. So it's the fairly tactical sector ETF. We call it TAC, as you know. And the design is as a core US large cap equity portfolio that has the ability to limit drawdowns through asset allocation.

19:45It sounds somewhat fancy, but in reality, we're using sector rotation to our benefit to make sure that we're participating in bull market cycles. But then when the indicators aren't aligned, when the momentum just isn't there, which of course we saw as recently as 2022, we have the ability to move tax from these sectors. We use sector ETFs as our positions into other asset classes, and that includes gold for one. that's also via an ETF. Short-term treasuries, which you can think about as somewhat of a cash equivalent, very C, but sort of muted in returns, tends to outperform equities during down drafts.

20:24And then also long-term treasuries, which will sort of get us that lack of correlation as well with equities. So we're seeing the portfolio morph with the market and it's that dynamic nature that I think there's real sort of, I'd say, value in that we can limit the drawdowns while being there to take advantage of the market upside through investments in what our models are telling us are the best sectors from momentum and relative strength perspective, and also lack any of those big sell signals, those overbought downturns that we are concerned about. We take a long-term view in the TAC ETF, and it is very conservative.

21:04We're rebalancing that portfolio once a month, using month-end closing data. So it's designed to be something that you can sort of, I say, set it and forget it because we don't want it to be a position folks will worry about. We want them to trust it to be there for the bull market cycles and to be navigating corrections, major corrections, and major downdrafts in a way that limits the drawdowns versus a passive investment in something like the S &P 500 SPYDER ETF or SPY. That's the goal is to limit those drawdowns and be there for the upside. And we're doing it systematically. And we really are believers that fairly in systematic approaches to investing.

21:45And this goes back to Robert's point about you don't just start buying individual stocks, because that can actually prove to be careless, despite all the success stories, by the way, that we hear about, well, oh, yeah, I built my nest egg in one position. And maybe you'll get lucky, right? That does happen. But for every one of those stories I think we hear probably don't hear the 10 that were exactly the opposite of that, right? So we feel like, you know, to have that sort of core portfolio is really important and applies to all investors. So it's easy for me to see as the manager of the ETF, right?

22:20But the application is really very broad to anybody who wants that U.S. equity exposure, but who is sensitive to drawdowns. And it will help us really get back to that exposure that, you know, a very tough market might shake us. COVID corrective phase is probably the best example of this in recent memory where we had a major drawdown and yet a major and very swift sort of comeback from that drawdown. And I think folks were so shaken by the drawdown that it took them too long to get back to the exposure they should have had from a momentum perspective. So when you have a system or a methodology that can help you evaluate these trends without any real bias and not remembering that drawdown.

23:09The market has its own memory. We don't need to worry about it. So to be somewhat reactive to these changes, I think is key. So you mentioned that TAC can also be thought of sort of this position in someone's portfolio that's more on the defensive side when they need to be. And so to add some more information and data around that, I just pulled up the TAC performance, total performance, when you guys, right, the last time we had a bear market was in 2022. You all introduced TAC to the market, I think the last week of March in 2022. And then throughout that, let's say March, late March, early April to the end of 2022, TAC traded down about 7 % compared to the S &P 500 trading down 17%, right?

23:52So you guys outperformed from a drawdown perspective by about 10 % against the S &P during this sort of bear market volatility. People were scared, not really sure what was going on there. How did you do that? What was TAC invested into where they didn't see that extra 10 % drawdown that the broader indices did see? And that was just the S &P. The NASDAQ was probably another, probably five or 6 % on top of that. Since TAC's inception, as you mentioned in March of 22, we've had, I'd say, three major drawdowns, including that bear cycle for the S &P 500 of more than 10%. And during those three major drawdowns, tech has outperformed the S &P 500 on average by about 7.5%.

24:31And that's exactly what we intended the model to do. So in a strong tape, we start with really eight buckets, eight equal rated buckets of 12.5 % or thereabouts in the sector ETFs. Now, if those sector ETFs aren't qualifying because of the momentum metrics and the things that we track, we will take that bucket and divide it between the short-term treasuries, long-term treasuries, and gold. And that's exactly where we stood for much of 2022. We had very heavy, what we call risk-off exposure, and that contributed to what we call a low beta for TAC as an ETF. That makes it a bit more conservative, meaning that it doesn't hold the same concentration risk, I'd say, that some funds do.

25:16And then when we see that the TAC ETF morphed back into a more full equity position, if the market's on fire, that's when we are all about supplementing a TAC as a core holding with technology stocks, right? Because we know that technology stocks tend to be higher beta, meaning that they tend to outperform on the upside. So when we see a strong TAC like we have had over the past six months or so, we are all about having TAC as a core holding and then going ahead and taking that position in NVIDIA and the likes to supplement it. I love it. And so what I'm hearing then is that for the average investor who is building that well-diversified portfolio, TAC could be thought of as the position of black swans, right?