ETF TV, Katie Stockton, Fairlead Strategies expects a volatility event to occur in January

Presented by Syntax Advisors.

Margareta Hricova Welcome to ETF TV – your insight into the world of exchange traded funds, issuers and investments. I am Margareta Hricova and I would like to wish everyone a happy, healthy and prosperous 2023. Joining me today is Katie Stockton, Founder and Managing Partner at Fairlead Strategies and Deborah Fuhr. Welcome, Katie and Debbie.

Katie Stockton Thanks so much.

Deborah Fuhr Thank you. So, Katie, great to have you. Can you tell us what the market technicals are telling you right now as we start 2023 for the U.S. market?

Katie Stockton Well, we know that a bear market cycle has its hold on the major indices. So looking at things like the S&P 500 index, they’re all in down trends. And I don’t think that’s going to change in early 2023. We have a little firmness that sees it all in nature as it stands. But I do think that we’ll see downside volatility starting in middle of January and that that could be the start of a bit of a volatility event. The good news is that volatility event could be the end of the bear market cycle. I think that this bear market cycle needs exactly that, which is sort of a capitulate of selling events that takes the major indices lower, but ultimately helps us establish a footing for the market from which we can kind of build a base and move out of that. So whatever the timing of that, we can’t be clear, obviously, until it happens. But we do think that this year, 2023, will be an inflection year. So we’re going to be looking for indications of a major low from the likes of the S&P 500. And with that, we’re expecting a bit of a shift on the macro front, looking at things like Treasury yields and the dollar. We would expect those which are still very much an established uptrends to at least lose some long term upside momentum, meaning that those uptrends should give way to a bit more of a gradual uptrend channel or even a trading range environment for those sort of macro influences on equities.

Deborah Fuhr And do you have any idea of what that volatility event that you referred to is going to be?

Katie Stockton Oh, I wish I did. The charts will sort of answer what’s happening and they won’t tell you why it’s happening. And we know what the known risks are, of course. Right, with the tightening cycle. But, you know, it could be a completely unknown event or it could simply be just a shift in market sentiment that’s driven by breakdowns, breakdowns in the likes of Apple perhaps. The Apple stock is a heavy influence on how investors feel about the equity market. That kind of breakdown could influence market sentiment in a negative way and be enough to get us that kind of volatility event perhaps. Bear market cycles tend to culminate with the VIX reading or volatility index reading closer to 50 or even above 50. And we have not really seen it come out of sort of the mid 30 range since this bear market cycle began. So that is one thing that we’re watching, in addition to many of our indicators which measure things like momentum, overbought, oversold readings and relative strength.

Margareta Hricova Can you share your view on international and emerging markets?

Katie Stockton Of course, while we’ve seen a long term trend of underperformance, of course, from international markets both developed and emerging versus the U.S., and yet we’re seeing some signs of life from those ratios. Looking at ETFs, for example, like EEM relative to the SPY, so emerging versus U.S., we see it a nice relief rally in relative terms, of course, that has been associated with a corrective phase in the dollar, which is likely to give way to a rebound. So I think it’s too early to suggest that the relative strength turnaround that we have seen of late is something that will be lasting. But it certainly could be the start of at least a basing phase in relative strength terms. And that of course, would be foster perhaps by that dollar uptrend kind of petering off or giving way to some kind of rangebound environment. So we are watching for relative strength to perhaps improve versus the U.S. for international equity markets. And yet in absolute terms, it’s really very difficult to make a case for adding exposure at these levels. And we say that because the long term momentum indicators that we track are still very much pointing in lower oversold conditions have not generally really elicited a big reaction. And that just as a reminder of the prevailing down trends that are mostly intact in Europe and beyond.

Deborah Fuhr And recently you launched your first ETF. Can you share with us the backstory on why you decided to launch an ETF?

Katie Stockton Right. So we launched the Fairlead tactical sector ETF or TACK in March of 2022. And we did that because we felt like there was a demand for it from our client base. So we have a research and consulting service covering primarily U.S. equities, but things that are influencing U.S. equities as well. And we found that there was a real need for sort of a sector rotation strategy. A lot of our clients were trying to do it themselves, but they had their day jobs and couldn’t focus on it in a systematic manner. So we have a systematic model that we built over a two or three years with the help of some quantitative clients and consultants, to take what we have always known as our methodology and sort of isolate that into a series of rules that became the basis of tax model. Knowing that there is demand for a sector rotation strategy, but also somewhat uncomfortable with releasing a strategy that was only U.S. equity centric because in our own investing, we would always be trying to manage risk during downdrafts by allocating to different asset classes. So we have with the tact model an asset allocation ability. TACK has leaned very risk off is what I would say throughout this bear market cycle in there and has been able to outperform nicely versus both the S&P 500 index and its own benchmark, which is the Morningstar Moderate Target Risk Index.

Margareta Hricova And who is using the ETF and how are they using it?

Katie Stockton There’s really a general appeal, I would say, in this kind of strategy because it is somewhat holistic. It’s long term in its focus, something that you can actually be comfortable buying and holding as opposed to just the sort of original buy and hold strategy where you just ignored the fact that the market was going against you for even a year or two at a time. We wanted to make sure that there is some risk management there, and that’s just something that holds general appeal. We’ve had real interest, of course, from individuals and from investment advisors who have found a great place in their sort of portfolio strategy for a product like this, which is unique in that it is technically driven, it is systematic and it is U.S. equity focused, but it has that sort of risk off piece or the ability to manage risk in a unique fashion.

Deborah Fuhr That’s great. Thank you for joining us.

Katie Stockton Thanks so much for having me.

Margareta Hricova Debbie, can you tell us some of the other news in the ETF industry?

Deborah Fuhr Sure. So we just ended 2022. So we’re in the process of cleaning the data. Some of the things we know for sure is we’ve had 43 months of consecutive net inflows. This is likely to be the second best year. In terms of net inflows. We know that 2021 was the best year with $1.3 trillion of net inflows. We know through the end of November we had 786 billion of net inflows. We have over 11,000 products with over 22,000 listings. There are 668 providers on 81 exchanges in 63 countries. When we look at the number of products that came to market during 2022, globally, it was 1607, down slightly from the prior year when the total was 1815. So we’re looking forward to 2023. We know IOSCO is going to be soon publishing their update on the consultation they did on ETFs. We know that many regulators around the world are looking at regulating index providers. Some are looking at creating ETF specific regulations. We think there’s going to be interesting product innovation. New countries are coming on board as well as new investors. So looking forward to the insights that we’ll learn over the course of 2023.

Margareta Hricova Thanks again, Katie, for joining us today and to our sponsors, Sytax advisors and of course to all of you for watching. To watch prior episodes and to see news from the ETF industry, visit us at ETF

ETF TV news does not provide investment advice nor recommend products.

Published on January 5, 2023