The stock market has not been ‘terribly resilient’ against shift in momentum: Strategist

Fairlead Strategies Founder and Managing Partner Katie Stockton joins Yahoo Finance Live to discuss the outlook for the stock market as investors grow weary amid the Russia-Ukraine war.

Video transcript

- Brian Sozzi asked an important question earlier today. Should investors be buying the dip in US equity markets? We talked about it through one person with Stuart Kaiser. Let's talk about it through another, the prism of technical analysis. And one of the best known people I think on this topic is Katie Stockton Fairlead Strategies founder and managing partner. Katie, I want to start just broadly with your chart of the S&P 500 and what you're seeing here in terms of whether people should step out in front of what's been going on recently.

KATIE STOCKTON: I think the answer really depends on their time horizon. What we saw late last year is a pretty significant loss of long-term upside momentum developing. And of course, that's manifested itself in a pretty sizable corrective phase at this point in the major indices. So that loss of upside momentum suggests that the market has moved into a trading range perhaps. And with a trading range environment, when you just buy and hold long term, it doesn't tend to pay off.

However, if you can be more short to intermediate term in your focus with a time frame of perhaps a couple of months maybe, that would be a little bit of a safer bet in terms of adding exposure into corrective phases in a trading range. So that's what our recommendation has been, to look for these dips to offer opportunities that are shorter term in nature as opposed to having the kind of buy and hold market that we had last year and even part of the year before off of the COVID corrective low.

- Katie, have you been surprised by the market's overall resilience?

KATIE STOCKTON: Not really. I would say I don't actually feel like it's been terribly resilient. It has not broken down, though. I think that's probably your point in terms of major support levels. If you look at the S&P 500, we're watching about 4,200 as a support level. And it does remain intact. So and yet we've seen pretty significant downside from the high point earlier this year. And I think that's, of course, a reflection of all of the uncertainties out there. And it's really just a very notable shift in terms of momentum from last year.

So I think we have seen certainly some weakness that is meaningful. And that could be somewhat lasting. Not to say that we're getting into a bear market, but into an environment that we're likening to something closer to 2018 where we had a bit of a range, and within that range, we saw heightened volatility. I do think that where we're really seeing the risk captured is in measures like the volatility index, or VIX. The VIX is now somewhat elevated, especially relative to last year, where the floor in the VIX was around 15 last year.

Now I suspect that it might be a bit higher, 18 to 20 something of that nature. And it's in these higher volatility cycles that you tend to see more of these big swings, not only day to day, but also month to month. So I think it'll be very challenging.

- I want to talk about energy stocks for a moment as well because that's an area, obviously, that has seen a lot of strength, along with the energy prices. And what are you seeing there in terms of whether that strength is set to continue or not?

KATIE STOCKTON: There's obviously still very strong short-term momentum behind energy stocks. And that's helped by crude oil prices just skyrocketing here. Now, it's not really a technical phenomenon, as you can imagine, that's driving these prices at this point. And they're very steep uptrends. Steep uptrends are really difficult to sustain over longer term periods. So I think that it is somewhat fragile. And yet we don't have that momentum downtick yet for certain names. There has been a little digestion phase unfold in some energy stocks, albeit not in the commodities as of yet. So there are some early indications perhaps that we'll see them start to stall up here.

And yet, I think what people need to think about is how comfortable are they with the position size that they have now in the energy sector relative to the rest of their portfolio. Because if it's grown to the point where all of a sudden they're finding themselves with such a huge overweight position versus their sort of S&P 500 exposure, I think they might want to rethink that because the energy sector is the only one that's in the green on the year. I think it was up last about 31% for the S&P 500 sectors.

And that compares to the next runner up, which was in the red, down about 3% in terms of consumer staples. So that kind of outperformance is very difficult to sustain. And what I fear is that with all the news and headlines around crude oil that we could wake up one morning to it gapping down pretty significantly. And of course, the energy stocks would not respond very well to that.

- Katie, lastly, do you expect a gap down in consumer discretionary stocks, just given what we are seeing here with gas prices?

KATIE STOCKTON: No. You know what, sometimes you'll see relative underperformance, right. So in a weaker tape, maybe they'll do worse than average. But the gaps down tend to be indicative oftentimes of sort of climactic selling. And I don't think that's what we're in store for or what we have at hand right now in terms of the consumer discretionary names. They kind of already did that with the corrective phase. Amazon is a great example of a stock that had broken down ahead of what now we have is actually some stabilization. So I'm not looking for gaps down there. I think some of it's already been absorbed by investors, that they've already underperformed. We're not too excited about their charts except some of them over the short and intermediate term time frame.

So we'd always keep that sort of broader risk framework in mind. And also keep in mind that most of them are now in downtrends. When you look at Amazon as a benchmark for the space, that stock has reversed a long-term uptrend going back years with the price action that we've seen. So to me, that suggests that any move is counter trend in nature. So we always have to be careful trying to trade those counter trend moves.

- Katie, good to see you. Katie Stockton, Fairlead Strategies founder and managing partner. Thanks so much. Appreciate it.