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What's the Alternative? | Episode 17 | Market Psychology and Technical Analysis featuring Katie Stockton
48 Plays18 days ago
In this episode, Shana explores the value of technical analysis in your investment toolkit through insights from Katie Stockton, founder of Fairlead Strategies. While traditionally overshadowed by fundamental or macro analysis, technical analysis plays an important role by focusing on price trends and market sentiment. Through examining historical events like the 2008 financial crisis and the 2022 bear market, Katie shows the power of technical tools such as moving averages. These indicators can help investors time the market effectively, manage risks, and minimize losses, shedding light on the essential nature of technical analysis in both factor investing and behavioral finance.
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Transcript
Value Managers & Momentum Challenges
00:00:00
Speaker
And I see that a lot with value managers because value managers are anti-momentum and it always bites them in the butt because what happens is they end up buying too early and selling early. And so they miss something.
Podcast Introduction & Host Introduction
00:00:16
Speaker
Welcome to Bond Run Capital Management's What's the Alternative podcast. Join host Shana Orzak-Sissel, the queen of alternatives and founder, CEO of Bond Run Capital Management, as she interviews leaders in the alternative investment space. Learn more about their firms, their passions, and about the many different ways investors can use alternative investments to add value in their investment portfolios.
00:00:44
Speaker
Welcome everyone ah to another episode of What's the Alternative?
Guest Introduction: Katie Stockton
00:00:48
Speaker
I am Shayna Orzak-Sissel, founder and CEO of Bonner & Capital Management. And today we have one of my favorite people in the whole world, ah Katie Stockton with Fairlead Strategies. Katie is somebody that I have admired from afar for a long time and then um saw her at a conference and basically fangirled her while I was on stage.
00:01:11
Speaker
And ever since, we have been friends. Katie is a contributor ah to CNBC, so I'm sure you've seen her face before. And she has a really unique background as a technical strategist, which um we don't see a lot. um and We definitely don't see a lot of women ah
Katie's Journey into Technical Analysis
00:01:31
Speaker
doing that role. So I'd love to hear more, Katie, about your background, how you kind of ended up on this path.
00:01:38
Speaker
And then we can talk a little bit about kind of how you manage money, how that is working in today's current environment, and how that helps you understand current market conditions. So welcome.
Fairlead Strategies & TAC ETF
00:01:50
Speaker
Thank you, Shana. Yeah, it's so good to see you too, even if it's remotely this time, hopefully in person again soon.
00:01:56
Speaker
And um yeah, as you mentioned, I'm a technical analyst and I got into it, I'd say pretty early on in that I was studying technical analysis in college and sort of leverage that into a full-time position. I had a great internship with a company called Dorsey Right, which is a very well-known point and figure charting shop. And my business model is actually not dissimilar to what they do. In terms of being at Fairlead Strategies, we're an independent research provider.
00:02:24
Speaker
of technical analysis, that's our first and foremost sort of role. But as you mentioned, we have an ETF, so we have the Fairlead Tactical Sector ETF, or TAC, T-A-C-K. And that is our first and only, at this time, investable product. And it's been a real sort of learning experience for me, but that's really my whole career. So it was actually at a point in my career where where I was ready to learn some more. And the technical discipline that we use here is something that's just kind of and I guess come together over the years where I've picked up different tools from different mentors along the way, just things that would resonate with me, whether it's just personality driven or ah you know mike my preferred time horizon or sort of risk tolerance. and That methodology is something that becomes really the stuff of our research, but then also the stuff of our ETF. We have a great team. We're based in Connecticut. and
00:03:22
Speaker
you know We all have experience, I'd say primarily as technical analysts, but we have great support as well and have great partners who help us look a lot bigger than we are. And I feel like we've had some you know good luck along the way, which is nice.
00:03:36
Speaker
Well, my first experience with technical analysis, like really getting into it was when I started at Fidelity because seeing the chart room and getting to hear from Urien is kind of like a rite of passage. I've become friendly with him over the years and I've always kind of admired his approach, but he is totally a technical strategist. The chart room is his baby. um If you go to Fidelity, um if you're ever there for a reason ah to visit, you should ask to see it.
00:04:04
Speaker
because It is gorgeous, isn't it? I've been there and I know that they keep and improving it and it becomes sort of a nice draw for the company. It's just gorgeous and i I was there back when they would print out the charts on paper and they had to outsource that too. I think it was somewhere in Asia or something that they had these big tubes that would contain the paper charts. Now, of course, it's electronic, but it's just really it's really special because as you know, when we're looking at history these days, we're we're not looking at that kind of history. Typically, we will use monthly bar charts, but these are monthly bar charts that will go back, I mean, you know hundreds of years, which is really cool. Yeah. i
00:04:45
Speaker
Every time I would hear Yurian speak, there would always be like little gems and whatever he was talking about from the technical side because I've never really been a technical analyst. um But I've always been interested in it. It's just it requires a lot more focus. As I'm sure you know, you've got to be watching the market at all times and paying attention to these things. And that's different never been what I've done.
00:05:05
Speaker
Why don't you talk a little bit about sort of what technical analysis is, how it sort of can be helpful for investors as they look at potential opportunities
Understanding Technical Analysis
00:05:15
Speaker
in the market. Because while I just stated I'm not a technical analyst, there are times where I've had to consider technicals in making buy-sell decisions um and in evaluating portfolios, especially as it pertains to like ah specific styles and and how they are affected by certain technical indicators. so Can you give our audience kind of an overview on what you what we're talking about when we say yeah technical analysis? Of course. and
00:05:43
Speaker
It does have multiple uses. It's not maybe as widely known as some of the other forms of investment research, like fundamental analysis, probably primarily and secondarily macro research or political inputs. But technical analysis to me is like the key complementary discipline to all of those.
00:06:02
Speaker
in that it's designed to help keep you on the right side of a trend. So it's the analysis of price trends. As we know, there are companies that are then represented by stocks, right, on the stock exchange. And the stocks sometimes trade in a way that's out of line with the company's fundamentals. They're looking at their balance sheet or their income statement or their cash flow growth. So we're here as technicians to help people navigate that when It's the market influence perhaps or the sectors influence or a style influence that will then trickle down to that individual stock. So it's a great way to come and navigate the volatility that is inherent to the securities prices and it's and an understanding of the market psychology behind it so we want to understand.
00:06:50
Speaker
Not necessarily what are these like long-term drivers of the trends which we trust to be fundamental or macro, but rather to understand what is the market's sort of pulse right now? What is the sentiment out there right now? And how is that and as sort of ah translating into these buy and sell decisions? Are buyers stronger? you know or more in numbers than sellers. And in that case, obviously you'll see the stock price moving higher and vice versa. So it's a ah study of the supply and demand that translates into these price trends. And I think it's become much more mainstream, largely because, at least over the course of my career, so when I got into it in the late 90s, obviously things were so moving in trends then too, and and quite strong trends at that. But we got into an environment where
00:07:41
Speaker
You know, in 2008, especially, the drawdowns could be so severe that the technicians out there that were vocal, and then we we owe a lot to the them, people like Ralph Acampora, for one. and You know, we're able to help people sort of keep it real, right? And to say that this is a downtrend, that type of thing. so I think it's that risk management element of technical analysis that is so valuable, and it's what we tend to emphasize in both our research and in our investable product tack, because we feel like if you can limit those drawdowns, you can avoid them entirely. and There is no holy grail of technical indicator, but if you can minimize your risk by using the charts and using the study of these price trends,
00:08:26
Speaker
ah That is really just so valuable, especially to someone who's investing at a later stage in life and just can't stomach it. 20% plus drawdown or something. Perhaps it's just more prolonged, you know, like let's say ah a year and a half long bear market cycle, which arguably we saw something close to that for much of 2022. So we feel like for for risk management and then secondarily for Market timing and that used to have sort of a negative connotation but now you know what who wouldn't want to buy something into weakness for selling the strength. Who wouldn't want to add something closer to support where buyers have stepped in in the past store.
00:09:05
Speaker
sell something closer to resistance where you actually have a better chance to see that security stall. So we have tools to help us understand when the risk reward is most favorable. So not just on the risk side, but on the reward side too. Looking for things like technical catalysts like breakouts and breakdowns and Add momentum buy signals and things of that nature so a way to identify catalyst to act upon especially let's say if you are a value oriented investor and you kept finding yourself just buying these kind of laggards and they stay that way for a long duration.
00:09:40
Speaker
It's like max frustration at times, so the charts can help folks in that segment of the market in particular identify facing phases and identify momentum shifts and relative performance shifts that might be meaningful. So you can see multiple uses with an emphasis on risk management and trend identification.
00:10:00
Speaker
And you know we we have a lot of great tools like moving averages to help us identify the prevailing trends. And we have some that are a bit more esoteric that will help us understand if those trends might be maturing. So we take in our own work here at Fairlead like a weight of the evidence approach.
00:10:16
Speaker
Awesome. It's funny because I feel like our industry as a whole has changed terminology, and i I'm not sure that everybody understands that some of the foundation that's built on things like factor investing and behavioral finance really are kind of driven by technical analysis. um you know If you think about factor investing factors just technical indicators, correct?
00:10:42
Speaker
Yeah, I would say not necessarily in all cases, but definitely there is sort of a basis right that's similar, especially with the behavioral ah finance and and how and you know someone who's focused on that might approach market. So ah you know at the end of the day, all we have is price to work with. right So we want to make sure to try to keep it as simple as possible.
00:11:04
Speaker
Factor investing can be very valuable. Where we feel like there's some risk to it is that when you make the technical tools um or have you sort of convert them into something that's really just more quantitative and less visual, right there's there's nothing, in my opinion, that can replace looking at the charts, actually, scrolling through a lot of charts. Because ah one, if you don't do that, you're at risk of missing something interesting.
00:11:31
Speaker
But two, it's that visual element and sort of the market's memory that then resonates with your history and looking at the charts and your experience. And, and you know, that there are computers that you can get you close to, say, pattern recognition.
00:11:45
Speaker
ah things of that nature, but you really can't replace a human's ability to identify these setups that are higher but probability. So that visual element to me is very important. It's not to say you can't make more
Favorite Technical Indicators & Sentiment Analysis
00:11:59
Speaker
quantitative the whole study of charts, right? You can obviously quantify a lot of the indicators and some of them are completely binary, you know, is it a bi or a cell signal? And there's sort of the the beauty of it in a way because if you're mathematically inclined, I think that tends to appeal where there's no gray areas to you know what this is. And then the only gray area is more how your bias is, how you let your own biases sort of trickle into your decision making. Are you looking for confirmation bias elsewhere or something, yeah that type of thing. But if you can approach it more systematically, where you're you're looking at the same charts with the same tools,
00:12:36
Speaker
time and time again, I think that's where the real value is. And and you know just it would caution folks from getting too many derivatives away from the price itself. right You can take ah you know multiple derivatives and realize that you're still looking at pretty much the same thing. And if ah you know you keep doing these different iterations of it, you're probably going to find whatever you think is is happening.
00:13:00
Speaker
ah rather than just keeping yourself honest, right? So and I do think it's good to keep it simple. It's good to always have that visual element, even if it's supported by my more quantitative work. It's interesting because I think what you did right there is ah educate me even a little bit, because I think we automatically assume that technicians and technical analysts are also quants. And you kind of just and told me that that's not always the case, right? And I never really thought about it in that respect, because I just feel like if you're not basing on fundamentals and you're dealing on some quantitative level, but and to your point, when I think about 2008, 2009, if you think about what happened to the quant during that period, a lot of it was because they didn't have that human ah looking at the chart and looking at it, they kind of
00:13:55
Speaker
got stuck by models that couldn't adjust based on certain data that a human probably could have noticed, changes in momentum and things of that nature. Too deep in the data, right? like They they there were too many derivatives away from the primary trend.
00:14:12
Speaker
i mean i think about how So many investors in that timeframe would have benefited from a very, very simple overlay of one of our indicators called the MACD, or Moving Average Convergence Divergence Indicator. It's probably the most, if not top three technical indicators in terms of usage globally. And it's a momentum slash trend following device, and it gives these decisive buy and sell signals with a bit of a lag to make sure that you you're eliminating the noise.
00:14:40
Speaker
around pullbacks and counter-trend moves, but a monthly MACD indicator laid over positions in that time frame generally would have been a super value add. The S and&P 500 index itself flashed a sell signal in November of 2007, and of course that proved very timely and helpful. so some Sometimes just a very simple trend overlay is incredibly helpful. It's funny, Sheena, that you bring that up with the quantitative sort of and perception, right? Because ah maybe our brains think the same way. and But I found that there was always the assumption when I worked on Wall Street that the quants would always love to hear about technical analysis. And it's true in some ways, but not in other ways. What I found is that
00:15:26
Speaker
They were really interested in the indicators themselves, the things that you could easily quantify. So they wanted to take something like this stochastic oscillator and really pick it apart and find out the benefits of it. And that's a great exercise. Mind you, I've worked with a lot of points to try to you know help us get to a place where we have more confidence in various setups and what have you.
00:15:47
Speaker
ah But then, ah you know, to holistically just limit yourself to a small sort of ah segment of indicators, perhaps, or without that visual element, I do think it can be limiting. So I think there's really got to be that visual element and.
00:16:03
Speaker
You know, I haven't found an AI based system yet, not yet, that can replace us as technicians. It's probably coming, who knows? ah But the the process is really the most important. And I think if I ah quant were to describe it, it is like a multi-factor model that we kind of create, but it's all done in a bit more of a subjective manner.
00:16:24
Speaker
So maybe you can walk us through, you touched on one, but what are your three favorite technical indicators that are kind of your go-to that maybe our listeners can kind of start with as they educate themselves on the different ins and outs of technical analysis? Yeah, and it's funny because not everybody even use technical uses technical indicators, right? there're There's something to sort of enhance or otherwise the primary trends. Some will just use trend maybe a couple of moving averages and try to identify support and important levels on the chart. We are really adhering to indicators and that's just in part because of my mentors along the way. and But i I have found, of course, a lot of value in the MACD over the years is just a primary trend flying device.
00:17:08
Speaker
We would categorize the indicators that we use in three ways as trend falling or momentum like the MACD, as overbought oversold like the stochastic oscillator, or as a relative performance indicator, so relative strength. So that would be my third would be relative strength next to the stochastic oscillator.
00:17:28
Speaker
And that usually will we measure through price to price ratios. and that's That's probably our methodology in its very simplest form. But there's, of course, a couple of other indicators that will be there to help us you know understand what what conviction we should have and and what we're seeing based on those three inputs, which I think are really, really important.
00:17:50
Speaker
and that if nothing more, everybody should have at least one indicator for each of those three categories. It almost doesn't matter what indicator that is, something that can and you know just help them stay on the right side of the trend, understand if the trend might be maturing, and then see where there's relative opportunity.
00:18:08
Speaker
So we often hear about sentiment um on CNBC and Bloomberg and and and things of that. I know I talk about sentiment all the time. There's a number of sentiment indicators. Some are technical and some are more subjective, if you will, like surveys. What do you think are the best sentiment indicators and technical like toolbox?
00:18:29
Speaker
You make a good point in that some are subjective. These investor polls can be really and interesting and informational, ah but I like to also have on our radar what I would call like transactional gauges of market sentiment.
00:18:45
Speaker
something like the volatility index or a put call ratio ah to try to understand if investors are getting hedged, which would mean, of course, they're more fearful or vice versa. And you can see in these types of indicators, whether there is extreme greed or extreme fear that the market's contending with. And that's when there tends to be opportunity from a contrarian perspective. So we're always looking for extremes in the likes of the VIX.
00:19:11
Speaker
And that can be informational. We'll cross-reference it with other sentiment gauges, like the fear and greed index for one, and also either the other market's internals measures, which are typically breadth, leadership, sentiment, and volume. At least from our perspective, we feel like those are the big and sort of internals that that serve as the support system for the markets. And if you lose the support,
00:19:38
Speaker
of more than one of these sort of segments that's a weaker tape typically. So we always look for these kinds of extremes in market sentiment. And it's when we have a collection of them, especially let's let's say if we have an overbought sentiment reading or an extreme reading where we have bullishness running very high. And then we look for a breath reading that shows the same thing where breath is really kind of overdone in like an oscillating measure.
00:20:04
Speaker
That can be a great way to understand if a trend is kind of nearing an inflection point, right? And that's where we can add a lot of value as technical analysts and you know for folks that are doing it themselves. I think to have an eye towards those extremes, especially if they're trading the equity market, and which would be relevant for the VIX and what have you, I think that that's going to be very helpful just as a way to say, okay, is now the right time to add or should I maybe wait for that next corrective phase?
00:20:33
Speaker
Well, it's interesting, you mentioned the VIX and you mentioned the put call ratio, and I've always wondered this. I have never felt like the VIX is actually a good measure of volatility, just the nature of what it is. um And then you look at the option markets, which typically will tell you something about volatility because when the volatility is rising in the market, um your your um your premiums go up.
00:20:58
Speaker
on everything in the option market. And so that can tell you something. you know In the technical world, um you know what do you think is the best measure of volatility? And um you know is the VIX really a reflection ah that can be helpful in a forward-looking way of what volatility is going to go in the future? Or is it really just a reflection of um you know and figuring out a trend and getting some gauge of you know where the might market might move from that point in time?
00:21:26
Speaker
I think people shouldn't think of it as like a trending indicator as much of something or as much as something that is more like an EKG. So when you see these spikes, that's when you have information. And otherwise, when it's sort of middling along, it's something you can generally ignore. But it's with the spikes that will hold the information. And that's when yeah it's not just necessarily that there already is increased volatility, but investors are anticipating it.
00:21:54
Speaker
you have this inverse correlation to the S and&P 500, which is incredibly valuable. And I understand the drawbacks as you of using the VIX as and partly a sentiment gauge, but especially as a way to get hedged, right? So there are instruments that will be there to give you VIX exposure.
00:22:15
Speaker
So, theoretically, being inverse to the S and&P 500, that would be great for a hedge, ah but it's really, really difficult to time those spikes. So, and I think it's sometimes a massive exercise in frustration trading these VIX-related products.
00:22:31
Speaker
So that that's one thing I would set off as an aside. um And that there are probably better and and, in a way, safer ways to get hedged, like using just a simple inverse ETF, ah which is you know even like a one-for-one you know sort of trade against a regular index. So I think there's better ways to do it. And then with the put-call ratios, I'll only have them on our radar if they are on Xtreme. So it's the same type of philosophy where The information is when you see that flurry right that flurry of activity one way or the other and that can just tell you when sentiment is such that we should maybe be thinking outside of the box and the volatility is is can be really dramatic on the downside.
00:23:17
Speaker
As you know for for s and p five hundred pullbacks and corrective phases. ah But with that you have to be ready to be there to add exposure right so it's almost it's like counterintuitive when you get these major downdrafts sentiment gets incredibly fearful and there is opportunity in that but it's really again just like timing the vix itself.
00:23:38
Speaker
It's difficult to capture that low, but it's really great to have an awareness of where it might be maturing because what we found and we we often will get questions about where there is a support level for individual positions of our clients during a corrective phase and we will give of course a support level.
00:23:57
Speaker
ah But we say that most stocks will probably bottom on the same day. So to give more weight in that environment to the top-down view and respect the price action in the S and&P 500, watching the indicators of course, but then also to keep an eye on things like the VIX to see where they seem to have reached an extreme point as a way to know when to maybe you know cover your short or get back into that position on the long side.
00:24:25
Speaker
with a little bit more confidence, even if the support level isn't right in line. I think that's interesting. I personally have evaluated VIX-oriented strategies that are investing in different derivative products um to gain exposure to the VIX in general, and they all kind of aren't good. None of them actually perform all that well because I think the average person, the average investor thinks, well, if I invest in the VIX, I can benefit from periods of high vol, right? That's the whole point. But that's not really how the VIX works. It's that's probably a not a ah good way to um benefit in a rising vol or
00:25:08
Speaker
high vol environment. um I would agree. Yeah, it's it's more about being there for those spikes and and you know talk about having to watch things on a daily basis with that kind of product. That's, to me, really the only way you're going to benefit from it because the spikes in the VIX will last days, not weeks. So if you're not watching it like a hawk, it would be really difficult to capture the benefit that they're going for. Right.
TAC ETF: Strategy & Market Adaptability
00:25:34
Speaker
Tell us a little bit about TAC. Now, first off, I want to just commend you on having launched ETFs in the past, having to have the conversation about tickers, and how to get it, and what the ticker should be, and how to like gain traction, because I'm sure you know this. A good ticker is invaluable, um and TAC is a great ticker. so Thank you. We were glad it wasn't taken.
00:25:59
Speaker
Oh, well, see, you lucked out when I launched House but for Armada. House was taken. We had to basically buy it off of somebody. Apparently, and I'm sure you know this, a lot of the larger institutions that do a lot of ETFs will buy out the ticker symbols and never use them. Then you got to figure out who owns it. It's like the the dot com era, right? yeah like I think i think i had we had to buy our website, the fairleadstrategies.com.
00:26:26
Speaker
Yeah, it's it's interesting. So I want to commend you on having a great ticker and also kind of um tells the investor what it does. I mean, tax tactical, it just makes perfect sense in my and my view. Tell us a little bit about you know your ETF, kind of what it's meant to do, how it kind of fits in a portfolio and and a little bit about how you kind of implement your investment process.
00:26:53
Speaker
right So, I mean, TAC was developed in response to our research clients who were doing these sector rotation strategies that I would argue maybe really aren't weren't very strategic. right They were interested in leveraging the sector performance and the dispersion, which can be really wide year over year. ah But without a systematic approach, it's really tough to benefit from that type of strategy because One, you'll dismiss it. and Two, it's difficult to market time, and you know especially because some of these dispersions occur over short time frames. ah But three, if it's not your primary area of focus, it's really difficult to keep up with it. And um and you can incur on top of that a lot of taxable events by trading in and out of sectors.
00:27:40
Speaker
So we found that there was a good sort of, I guess, at need from our client base for that kind of strategy. We also felt like the sector rotation was sort of low hanging fruit from the markets in terms of that relative performance that you'll see that is so distinctly positive or negative for different sectors at different times.
00:28:00
Speaker
So that was something we wanted to take advantage of, but we created something that's really aligned with our um own methodology and our own, I'd say, risk aversion in that we wanted to make sure that we had real attention with this tactical strategy to limiting those drawdowns.
00:28:17
Speaker
And we tested it many, many ways and arrived at using an asset allocation through the use of ETFs to arrive at something that protected on the downside. So while it's at its core, a sector rotation based fund will in a strong market invest in eight sectors, approximately equal weight around 12.5%.
00:28:39
Speaker
But in a tape that's weakening or weak, we will have less than that. Sometimes over the course of the model, we saw it go fully risk off. And that risk off piece, a risk off bucket would look something pretty similar to a third, a third, a third, short term treasuries, long term treasuries, and gold. And again, all of that via ETFs.
00:28:59
Speaker
It creates this kind of holistic portfolio, almost a replacement for the old buy and hold type of strategy or or sort of the traditional 60-40 model, ah but with a real dynamic element to it, because at times it will be ah basically 100% equities, and at other times it will be and you know substantially the risk off through those other asset classes. So we found that over time,
00:29:25
Speaker
Not just over the course of the model, which we drew back to 2000, but since inception, which was in March of 22, to watch how TAC responds from its model-driven methodology to different environments. We've had more than a full cycle since we launched, which is kind of a gift in a way. 2022 is a difficult year.
00:29:47
Speaker
ah for both equities and long-term treasuries, but we were able to outperform by a good degree even in that environment. And that sort of proved the muster of the tacky TF. And now ah as we've come out of that with a very strong bull market cycle, ah we've really been able to leverage the upside using that sector rotation too. particularly as sector breadth has expanded, meaning that it's not just all about the technology sector or all about mega caps, but that other sectors have sort of joined the party, if you will. And, um you know, we expect to see tax stay with this position until the long-term indicators. We're using month-end closing indicators and rebalancing monthly until those indicators suggest that we've moved into something that is more significant than just a pullback.
00:30:36
Speaker
And so we're not going to worry and we hope investors generally don't worry about pullbacks about where we want to reposition and stirring significant corrections and ah draw down. So and we're going to obviously keep a very close eye on our indicators. We do have some signs of long term upside exhaustion in the market. So and we we trust that it's not going to look just like it does now um in the next few months.
00:31:00
Speaker
So the way that fits into a broader portfolio, Gina, has been like a harder question for us to answer and something that we've had to develop in a way or thinking around as we've grown. And it's not simple because it can't necessarily just fit into, like let's say, you know, a U.S. large cap core, which actually will be like right now, it is definitely that, right? It has all eight S and&P 500 sectors. It's done away with the bottom three by our models.
00:31:30
Speaker
looking at long-term trend falling metrics, overbought oversold metrics, and relative strength metrics. So but we have what we think are the best of the best right now. ah So it is 100% equities, but because it morphs into that position that's largely fixed income, of course, it it at times wouldn't really fit into that sleeve of a portfolio for an advisor. So some have treated it as maybe a more of a hedged equity product.
00:31:54
Speaker
the return profiles quite similar to some of them, but the risk profile is really very attractive on a relative basis because it's incredibly low beta and low correlation, which is an appeal, I think, to a lot of advisors. So, hedge equity has been a way it's been treated or as sort of a satellite technical analysis sleeve as something that that they see as just a different discipline. I talked to someone the other day and I thought this was really interesting the way they were thinking about him You know how there there's these sleeves or these sort of categories that that folks would try to put products into that that's changing in a way or should change.
00:32:35
Speaker
because of active products, right? Active products that don't necessarily fit into the traditional sleeves, right?
Evolution of Investment Strategies
00:32:42
Speaker
Because they are indeed that active, right? So they don't have that same um sort of simple categorization. It probably makes some folks' jobs a little bit harder, but I do think it's probably a bit of the new normal as more and more active products into the market.
00:32:58
Speaker
Well, it's funny you say that because at Bonnerian, that's our whole philosophy. It's about helping advisors with the stuff around the edges. That's not clearly an equity or fixed income. Or if it is, there's some reason why it it can't be treated in the same way. Like private equity and private credit, I always say, are still equity and credit. It's just a liquidity aspect of it that you have to consider. And and and it's not accessible to everybody. And so those discussions about allocating to those types of products become more of a discussion about liquidity budget and not where does it come from. um Whereas I call it the diversifying bucket, the alts bucket. At one point, I worked at a firm where we called it the alpha bucket, where we put the things that don't fit nicely in little boxes. And the one thing they all have in common is low correlation to each other and to broader public markets.
00:33:53
Speaker
um And that I think is kind of where I see it evolving. You were talking a little bit about the 6040 and things of that nature. I always say the 64 is not dead. It's evolving. um And as more and more of these products come out, you know i I think advisors in general, at least the clients we talk to, see the value in adding things like this. But to your point, really don't know where it goes and Morningstar and Lippert don't do us any favors because there's no way to really put these things in nice boxes. Hedged equity products can end up in options based, but also long short. And then they may have almost identical return profiles and risk profiles, but they're just the way they get at it is differently. And I'm sure tactical allocation, I don't know where tax it, but I'm guessing tactical allocation. that's yeah um
00:34:42
Speaker
but tactical allocation global macro um have a lot of overlap too so it's really about understanding those nuances which can be really hard if the only resource you have to work with is you know i just the databases and the groupings that you know those providers have and I've talked to Morningstar and it's not that Morningstar wouldn't like to make it better they just don't know how.
Categorizing Investment Products by Goals
00:35:04
Speaker
um yeah so Yeah, I think it'll come, you know, as more products hit the market and as more folks like ourselves push back on it the traditional sort of categorization. I mean, ours is U.S. tactical asset allocation. yeah And it's the primary benchmark was until they just changed the benchmark rules, the Morningstar Moderate Target Risk Index, right, which is sort of like a 60-40 type of model.
00:35:30
Speaker
um And so there are certainly some accuracies there. But when I looked at the other funds in the category, really really none could, to me, be considered a comp. So it's a tricky way to understand what could you know sort of broadly be called as a liquid alt, right? right you know so So I think as as we go along, we'll see more and more, like ah I guess, adaptation to that. And I know that your company is doing things to that end, which is great. Yeah, I think it'll always be hard.
00:35:58
Speaker
i feel like the livers in the morning stars of the world because one of the ways that they've always categorized things and it's all based on. You know a bell curve right so if i'm looking at value stocks i take the entire universe and i figure out you know on the bell curve.
00:36:15
Speaker
which things are at the edges in terms of valuation. And then I kind of split the bell curve in half and half goes in value and half goes in growth. And that's why a lot of value and growth managers hate that because they don't they might get thrown in growth because at any point in time they fit somewhere different on the bell curve.
00:36:34
Speaker
But it's harder to do that with strategies that don't have a ton in common in terms of those kind of metrics when you're really just looking at correlations um and underlying instruments being used to actually execute the strategy. Options-based is a perfect example. That category is just anything that uses options. And I would argue that's a horrible way to categorize often-based strategies because you could have covered call stuff with buffer funds and those are drastically different products. Another way to think a but about it would be maybe to define not the composure or not to let the composure of a fund define where it lives but rather let the goal of the fund define that. So with a buffered product clearly the goal is to hedge downside right so that might be one bucket is
00:37:22
Speaker
you know, something along those lines and arguably hedged equity type of sleeve would be that. And then otherwise, you know, just just try to understand what is the level of risk aversion that comes with this fund. Generally have an idea of what the asset classes are, and but but not let that necessarily drive where it lives. I think it's a ah great way to for people to start to think in a new way about these things. And I think it's only and going to help investors in that we have these opportunities to you know Get exposure, by the way, to stuff that we might think is is pretty boring. right like I don't have a lot of clients asking me about you know any opportunities that you've seen in consumer staples lately. and they They don't do that, quite frankly. you know Occasionally, we'll get a stock that they're interested in. But in general, the the questions that I feel are primarily based on
00:38:11
Speaker
ah new tech innovation, you know, those types of companies or those sectors. And with that sort of limited at interest zone, right, I think investors really are well served by having opportunities to invest in other areas of the market that they're less interested in, in a way that's kind of um done for them, right? It's dynamic and they don't have to worry about it.
00:38:34
Speaker
Yeah, because there's complexity here. I also think, well, I love your idea. And that's how the hedge fund indices and hedge fund peer groups have always been generated by looking at you know the purpose. I think if they did that in the traditional mutual fund and ETF categories, there would be a complete revolt by the traditional guys who spend way too much time and effort trying to lobby for their fund to be moved um as I was saying, value and growth in core, right? like Sometimes you end up in core, but you're like a value manager, and that's how I approach things. It's in my name. I'm always looking at valuations. Yeah, that makes sense. And that never works, and they never get anything. So if all of a sudden, all the esoteric stuff had the chance to do that. I think they would just revolt.
00:39:25
Speaker
But I do think i may really like longer than yeah ah to your point, though, something has to be done because we're not doing our advisor clients a service if we're not helping them understand how to use these products. And if it starts with categorization, we've got to get the categories right so that the products are used correctly.
00:39:45
Speaker
That's right. It is a challenge.
Minimizing Drawdowns & Stable Risk Profiles
00:39:48
Speaker
Without question, it's been one of our biggest challenges. And we have, you know, in our roadshow that we use for TAC, we have a chart that shows how it sort of lands in that spectrum between, ah you know, value, growth and blend over the course of each year. And it's moved all over the place. so So right, that's that's a challenge for advisors, and because they can't, you know, sort of bucket it any individual sort of factor. And then we've even had the first year, it was overall about 12% in its equity exposure. Second year about
00:40:24
Speaker
30 to 40 percent and third year almost 99 percent so it's really morphed into different cycles and i think that's gonna be another challenge but i think it's hopefully a welcome challenge because i think that sort of risk the return profile is is really very compelling.
00:40:43
Speaker
when you can you know post returns, but also feel comfortable that your drawdowns just will be minimized in a way that, and especially for someone coming into retirement or in retirement ah you know who doesn't want to worry about their money, I think it's a ah great opportunity for them. And I do think that you kind of pointed out, which I think is an important caveat, a lot of advisors try to be technical by stock picking.
00:41:08
Speaker
And that is the loser's game to tactical allocation. And it's trying to pick the right stocks to be taxable to. My experience, having worked at Fidelity, having worked with Urien, having worked with Global Asset Allocation, as that was the division of Fidelity I worked in. um And so you would it was really about market cycles. It was really about broad themes and and making the decision, OK, this is the part of the market that tends to,
00:41:38
Speaker
benefit value, or benefit growth. or but Well, growth isn't a factor, and it's not even a technical indicator. It's it's ah it's a fundamental indicator. But momentum, if you want to do what Cliff Bassman says, value and momentum is the ah opposite of value. um And looking at things like that, you know, That's where the tactical aspect comes from. It's not where should I be? What bond should I pick? What stock should I pick? It's that at this part in the market cycle, based on these technical indicators, there is a signal here that tells me I should be overweight value or overweight growth. But unless you're you, I would argue most of us laymen, ah you know not ah you know as knowledgeable as you, should probably never be out of anything completely.
00:42:29
Speaker
Well, I guess you're giving me way too much credit there. But I agree with you. When I tell people to reduce, I genuinely mean reduce, not cut your whole portfolio, right? There's, of course, always that segment of ultra short-term investors, and they try to leverage intraday volatility, and that's different. ah But for ah sort of the everyday investor, me included, quite frankly,
00:42:53
Speaker
and you know I believe in always having that the core long exposure because you need to be there when the market comes back out of these down cycles.
Systematic Stock Picking & Trend Following
00:43:01
Speaker
ah But if you can be there with less exposure, however you get there, ah you're really well served by that over the long term in terms of your that risk-reward profile. so I think it's really valuable for for those, by the way, people who are stock pickers, and you know, if you have enough time and you have a system, i I actually think it's very possible to succeed in that. I do think the systematic piece is really key and that there are certainly a lot of people that at could use that, you know, could find a methodology that would help them stick to a discipline. and But that aside, you know I see the sort of stock picking, which is usually seems to be in those more exciting, innovative areas, right? Maybe it's green energy or cloud computing. and you know That's a great but sort of thing to do in a strong tape. Of course, in a weaker tape, it's not as great. It's much more difficult. But if you can have a core portfolio that has that kind of yeah
00:44:00
Speaker
very, very comfortable risk profile to it. But then in a stronger tape, that's when you apply those skills and stock picking and say, well, ah you know, and you can be a simple trend filter that you use, say, if the S and&P 500 is above whatever moving average, well, I'm going to I'm going to go ahead and, you know, go back to my technology stock charts and see what I can do to leverage that upside. Right. So I believe in stock picking.
00:44:26
Speaker
I believe in a systematic approach to it where possible, but I really would emphasize that the top-down, sort of trickle-down effect from the market is key because it's going to be really hard to succeed in that if the market's working against you.
00:44:41
Speaker
Yeah, I think it's interesting. Even the most, you know, um adamant fundamental managers, I think you could argue whether they like to admit it or not, there is somebody filtering something technical in their process, whether that be that they've chosen to add it or their trader does it for them.
00:45:05
Speaker
and okay Yeah, we hope so that there's some resident technician behind the scenes right helping out. I know certainly at Fidelity, they had a great technical team and you know to back up the fundamental research. And ah you know once you learn technical analysis, I think it would be really difficult to invest in something without having a sense of what that chart looks like. And it can be just that simple, just having a quick glance at a chart to make sure that it supports your positioning.
00:45:33
Speaker
and then having some way to follow up. And it can be as simple as, you know, you don't have to watch the market at all times, especially if you're a long-term investor. You can go every month and in scroll through your portfolio. There's so many systems that allow you to do that now. And just look at the charts and, and you know, you can call your advisor or you yourself can, ah you know, sort sort of ask the question, is this still looking good? You know, does it still look like a strong uptrend?
00:46:00
Speaker
ah or for whatever turn around play that that's what you're going for. so and I do recommend that you know the best way to succeed is by trading stocks or positions that are in uptrends. It sounds simple, but there are a lot of people, and I'd say in a way myself included, that really hold appeal in counter trend positions.
00:46:22
Speaker
so ah But counter trend positions are lower probability just by the nature of they're they're in a downtrend for a reason. So you have to trust that there's something that's put them in that downtrend, whether it's specific to that security or otherwise. So we really believe in trend following longer
Momentum Filters for Value Managers
00:46:40
Speaker
term. And you know that means you check the charts 12 times a year. That's a great way to start.
00:46:46
Speaker
Yeah, no, I think um one of the most common things I've seen is um just understanding entry points and exit points. right So like I may like a stock in a downtrend, counter trend kind of stock, but I might use a technical tool to help me understand when's the best entry point. And I see that a lot with value managers because value managers are anti-momentum.
00:47:10
Speaker
And it always bites them in the butt because what happens is they end up buying too early and selling early. And so they miss something. um And so a lot of value managers will add some sort of momentum filter, um whether it be relative strength or moving average or something of that nature, to their freighting signals. Not necessarily, do I like the stock or not?
00:47:33
Speaker
um But more of when should I enter or add to the position and when should I exit or reduce the position because those are like i I saw one I think it was in best go had a fund where it just eliminate anything in the bottom decile of momentum if it had Super low momentum. They just yeah wouldn't even buy it. If it was in that bucket, it wasn't um on the buy list. I think it was a force out yeah yeah so that that's one thing I've definitely seen.
00:48:04
Speaker
I think that's great. I think to have any kind of trend following filter is going to be beneficial. And a lot of value oriented portfolio managers are going to be the quickest ones to say, oh, well, I don't use technical analysis. um I think they're almost being old fashioned in the way they're thinking about the discipline, and but rather ah To have even just some relative performance metrics to enhance what they're seeing, um I think conceptually, it would make a lot of sense to them to to understand that, well, gosh, you know this security, this stock in particular is starting to outperform. It's still range-bound, but all of a sudden, we're seeing these positive divergences.
00:48:44
Speaker
And it's starting to outperform quietly, maybe it's versus the sector versus the broader market index. and But that quiet outperformance can be incredibly valuable to tune into even before you get the breakout, which is where the value oriented portfolio managers tend to start to feel like they miss something, right?
00:49:02
Speaker
and So I think just to have a little bit of an a relative input to that end is super helpful. And the price momentum, you can catch it in its earlier stages using some of those technical indicators for sure.
00:49:15
Speaker
Yeah, no, I agree wholeheartedly. Well, I would like to thank you for your
Episode Wrap-up & Appreciation
00:49:20
Speaker
time. I don't want to use up too much of it. We try to keep these episodes under an hour. I think what you bring to the table, what you're doing is unique. We hear a lot about these indicators from folks like you on CNBC, but like finding an actual, investable way um to to leverage them is harder. um And so it was great to have you on the show today. I really appreciate your time.
00:49:41
Speaker
and We will include in our show notes information about how people can find you. um But as always, you can always catch Katie on CNBC. I do all the time. um And she's definitely worth paying attention to for sure. Thank you, Shana. So good to see you.
00:50:00
Speaker
All right, everyone. That's it for this episode of What's the Alternative? I am Shayne Orzak Sissel, founder and CEO of Bonner & Capital Management. And we encourage you to please ah leave a comment and let us know how ah your thoughts on this episode. If there's a guest that you'd love to hear from or a topic, let us know. And don't forget to like and subscribe to this episode. Until next time.
00:50:30
Speaker
The opinions expressed on the What's the Alternative podcast are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or in any specific security. This is only intended to provide education about the financial industry to determine which investments may be appropriate for you consult your financial advisor prior to investing. Any past performance discussed during this podcast is no guarantee of future results. The guests featured on this program are participants on Bonrion Capital Management's platform. As such, Bonrion may receive payment for their participation as a platform partner. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always, please remember investing involves risk and possible loss of principal capital. Please seek advice from a licensed investment professional. Investments are not FDIC insured, nor are they deposits of or guarantees by a bank or any other entity, so they may lose value. Investors should carefully consider investment objectives risks
00:51:42
Speaker
charges and expenses, this and other important information is contained in the fund prospectus and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. Statements attributed to an individual represent the opinions of that individual as of the date of the published podcast and do not necessarily reflect the opinions of Bondry and Capital Management or its affiliates. This information is intended to provide educational value, highlight issues and should not be considered advice, an endorsement or a recommendation. All Bonrune Capital trademarks mentioned are owned by Bonrune Capital Management Inc., an affiliated company, or its funds. All other company and product names mentioned are the property of their respective companies.