S&P 500 relief rally has ‘good breadth,' provides a selling opportunity: Strategist

Fairlead Strategies Founder and Managing Partner Katie Stockton joins Yahoo Finance Live to discuss market expectations, inflation, and the outlook for tech stocks.

Video Transcript

[MUSIC PLAYING] JULIE HYMAN: The S&P 500 drifting a little bit I think we can say to start the week, it is very slightly higher. Let's take a look at some of the market internals and technicals to signal perhaps where things could be going next. Katie Stockton is joining us now, Fairlead Strategies founder and managing partner. Katie, it's good to see you. KATIE STOCKTON: You too. JULIE HYMAN: I know that you have been looking at the sort of overbought versus oversold indicators for the S&P 500. What can that tell you and therefore tell us hopefully, about where we are going next? KATIE STOCKTON: It's all about reconciling different time horizons because on the long-term charts, which we use monthly bar charts for. We have downturns, and that tells us that this year is going to be harder. I think we've already felt that as of Q1. And yet, on the intermediate-term charts for which we use weekly bars, we have upturns. So we have to reconcile those two timeframes and try to understand maybe what the duration of this relief rally will be. The longer-term setup suggests that it won't last long term, it won't last beyond perhaps even the next few weeks. But the weekly charts or the intermediate-term gauges do suggest that we'll see additional upside. And of course, we're into a pretty seasonally blessed month of April. We often see markets peak sometimes around May, you know, the sell in May adage. So we are looking for upside probably through this month. Not of the same sort of momentum as we saw off of that mid-March low but still to see stocks forge higher. We've had pretty good breadth on this relief rally. It is something however that we'd probably be using as a selling opportunity just depending on what you're looking at. BRIAN SOZZI: Well, one sector I am looking at, Katie, is this I would say modest recovery in FAANG stocks, that's Facebook, Apple, Amazon, Netflix, and Google or Alphabet. Do you think that rally in FAANG is over? KATIE STOCKTON: Not yet. I don't think so. And I say that for really the same reasons as the indicators that apply to the S&P 500 and other major indices. We saw the FAANG complex plus Microsoft, plus Tesla, come down to key support in March and they held. It was a hard test but they held. And since then they have exhibited upside leadership. And that's important because obviously, that's a boon to the large-cap benchmarks especially, but even beyond that deeper mega-- below the mega-cap sort of complex we do have good participation. So we're encouraged by the leadership there. We think it will continue in part because they have some-short term breakouts on their charts. And breakouts tend to foster additional upside momentum. A breakout is essentially when a stock clears a level where sellers had stepped in, in the past. So we are seeing things like the 50-day moving averages cleared, and other previous minor peaks on their charts. And that is something that could foster additional momentum. So we would still stay the course, on the mega-cap complex, and then there in also the major indices. But eventually, we think within several weeks we'll probably have an opportunity to reduce exposure ahead of another corrective phase. JULIE HYMAN: Very interesting. And Katie, this is sort of a little bit of a left turn from the strict technical analysis but I am curious because we learned from MSCI and S&P Dow Jones Indices recently, that the tech weightings were sort of going to be shifted in the S&P 500. And the conventional wisdom is always that they are so heavily weighted, right, it's 28% of the index. So I just wonder if that will also sort of change the technicals of the major averages once we get that sort of rejiggering happening? KATIE STOCKTON: Yeah. I would think it would have an impact. I don't know how meaningful it would be, except in sort of that short-term time frame during the transition phase. It's going to change or create a rebalance I think for some of the ETFs that have that exposure. So that could exacerbate any moves in response to that kind of rejiggering of those indices. And yet, we kind of welcome the change. And that really is all about tech these days in terms of driving the major indices. So we believe that sector rotation and relative strength is really the key to outperforming these major indices. And yet sometimes it does feel like if you're not exposed to technology, you're not really exposed to these benchmarks to which we're always comparing our portfolio performance. So I do welcome a change that would be reflective of more sector positioning and allow us to see really the impact of perhaps the energy sector or the material sector, areas of the market that haven't had quite the footprint. BRIAN SOZZI: And Katie, you flagged to us coffee chain-- upstart coffee chain Dutch Bros starting to break out. What do you think is driving that? And then do you see any other stocks or key names starting to break out as well? KATIE STOCKTON: Breakouts tend to be really I guess, fostered by market sentiment I think more than anything else. So I don't know the fundamentals of Dutch Bros. But I do know that I cleared a key resistance level on the chart, completed a base breakout with that. It's a high beta stock, so you'll see outperformance on the upside and underperformance on the downside on any given day. And yet the shape of the chart is pretty promising in my opinion, more so than Starbucks, which I know today just sort of fell down after an unsuccessful test of its down trending 50-day moving average. So in terms of breakouts, I think we can circle back to the FAANG, plus M plus T complex. So those mega-caps do have short-term breakouts. But even deeper down the market cap spectrum, in let's say, small to mid-cap software stocks we have a lot of breakouts, a lot of names are clearing their 50-day moving averages. In fact, we saw I think it was something close to 75% of the S&P 500 above their 50-day averages just in the past week or so. And that means these minor resistance levels, not major breakouts, are certainly very plentiful. Even in some spaces, we're seeing new highs registering. We've some new highs in the insurance complex. In utility stocks of all things, we're seeing some breakouts to new highs. So they are out there, they're a little bit fewer and farther between just given the corrective phase from Q1. JULIE HYMAN: Interesting about the utilities for sure. Finally, I want to ask you about Bitcoin because oh, let's face it, in the absence of trying to figure out what the heck is going on in that market, most of the time a lot of people watch the technical charts for Bitcoin. So what are they telling you right now in terms of we've seen a little bit of a rebound there, is that going to continue? KATIE STOCKTON: Yeah, I think just like the equity market we'll see some upside follow-through in terms of this relief rally. I think it's right to label it a relief rally because that kind of indicates it may be short-lived and certainly frames it within the corrective phase, which of course, is very sharp for Bitcoin in particular, that preceded it. So we are looking at it not necessarily as a real counter-trend move but something that might not have complete staying power here. So we've seen some upturns that are somewhat promising intermediate term. And thankfully, Bitcoin did hold some key support before it saw this relief rally. So the gradual long-term uptrend is still technically intact. However, just like the equity market or the major indices like the S&P 500, Bitcoin, and almost all other altcoins that we track have seen a very notable loss of long-term upside momentum. And it just creates a much more challenging environment for traders, in that we have to be a little bit more short to intermediate-term in our focus, and make sure to have these trending indicators and gauges on our side, they can be as simple as a moving average. But we wouldn't be fighting against any trends in this kind of environment, which we think is perhaps more range-bound.