Fill The Gap Episode Thirty-Four, with John Kolovos, CMT, CFA

 


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Summary

The barrier to entry for online “fin-Influencers” is incredibly low, but responsible professional technical analysis covers an immense body of knowledge. In this episode, we dig into the complexity behind John’s technical mosaic and the multi-factor models he uses. Yet, the simplicity with which he communicates market conditions and portfolio construction to his institutional clients cannot be overstated.

While understanding “the health of the market” allows portfolio managers to responsibly take on risk for clients while maintaining situational awareness of market fragility, ignoring intermarket relationships and bottom-up trends leaves precious alpha off the table and presents career risk. Considering the ~60% rally of US equities off the LTCM low in 1998 to the peak in March of 2000, a lack of breadth is not reason enough to avoid market risk.

The long and winding road of John’s career on Wall St. allowed him to learn from many notable practitioners from his early days at Lehman Brothers to more recently as a buy-side technical strategist at Fidelity (FMR). He outlines a fascinating genealogy of technical analysts in his “family tree,” which he takes great inspiration from and aspires to pay forward that is rooted in Robert J. Farell’s Merrill Lynch technical research group. John is a huge advocate for technical analysis, where he is an adjunct university professor and an executive board member of the CMT Association.

Enjoy this insightful, informative, and hilarious episode of Fill the Gap with John Kolovos, CMT, CFA!

Fill the Gap, hosted by David Lundgren, CMT, CFA and Tyler Wood, CMT brings veteran market analysts and money managers onto a monthly podcast.

For complete show notes of every episode, visit: https://cmta.dev/development/podcasts/

Transcript

Tyler Wood, CMT 0:13
Welcome to fill the gap, the official podcast series of the CMT Association hosted by David Lundgren and Tyler wood. This monthly podcast will bring veterans market analysts and money managers into conversations that will explore the interviewees investment philosophy, their process and decision making tools. By learning more about their key mentors early influences and their long careers in financial services filled the gap will highlight lessons our guests have learned over many decades and multiple market cycles. Join us in conversation with the men and women of Wall Street, who discovered engineered and refine the design of technical markets.

Fill the Gap is brought to you with support from Optima, a professional charting and data analytics platform. Whether you’re a professional analyst, Portfolio Manager or trader, Optima provides advanced technical and quantitative software to help you discover financial opportunities. Candidates in the CMT program gain free access to these powerful tools during the course of their study, learn more@optima.com

Hello, and welcome to episode 34 of fill the gap the official podcast of the CMT Association. My name is Tyler wood. I am a chartered market technician and with me as always, is David Lungren CFA CMT. How’re you doing my friend?

David Lundgren, CMT, CFA 1:58
You know, my mood has improved as a day has gone on because hopefully we’ve gotten in the in the words of infamous William O’Neal. Hopefully we’ve gotten a follow through day today. Big day in the markets, which we discussed with our guests today. And we’ll see what happens but it’s good to see you as always.

Tyler Wood, CMT 2:15
It’s great to see you. It’s here on November 2 2023. Markets just closed about a half an hour ago, we spent the whole afternoon trading session just picking the brain of one John Colombo’s current vice president of the board of directors for the CMT Association, also Chief Technical strategist at macro risk advisors, Dave highlights, and there are so many stands out from that hilarious, insightful informative discussion we just said,

David Lundgren, CMT, CFA 2:42
I think if I just kind of reflect on all the things we talked about what I really loved about it was when when he took the time to walk through his genealogy, in the technical industry, you know, who, who he considers to be like his grandfather, now, you know, the title, he uses his grandfather. And so, Jonathan Graf is his grandfather, and I’m not sure how kindly Joe will take to that. But what his point being is it is that, you know, Jeff, you know, brought him into the business and hired him as his first, you know, role as a technician, and then you all everybody in the business, I mean, for the most part, it’s certainly as it relates to the association, we can point all the way back to our great great, great, great grandfather of being Bob Farrell. And in all of his offspring that came out of Merrill Lynch, and from there that one seed planted at Merrill Lynch, welfare, Kapoor and others. And, you know, here we are, we can all reflect back on on through our genealogy, we can all lead right back to that one spot, which I just think is really fascinating.

Tyler Wood, CMT 3:41
It is, it is fascinating also to think about how much technical analysis was taught on the fly on the desk, through, you know, learning by doing in the sense that prior to the CMT program, there wasn’t a single body of knowledge, a candidate process that you would go through to scaffold the understand, you know, you learned by working with people who had been in the markets for a long time, incredible learning experience, and certainly for all of our listeners, I hope you have great mentors. And if you don’t, you need to hook up with a community full of good mentors, but Exactly, yeah. That genealogy for sure speaks to the decades of this professionalism and the responsible practice of technical analysis, really being taught by hat, you know, in rote fashion, right? Yeah. through mentorship. The the piece to me, Dave, that really stuck out and I was reminded of a comment, Brian Shannon made at a recent conference. He said, Look, your clients pay you to manage risk better than the market and that they’re not, they’re not paying you to just hold the index. They’re not paying you to, you know, to sit there but to actually take risk for them responsibly. And so when we’re talking through The John stock selection process but also is, you know, kind of scenario planning or top down view. It really, it really makes no difference where the s&p 500 goes. And we had a great update today and the markets closing around 4300. But that’s not that’s not what portfolio management is about. And that regardless of whether we chop around sideways in this purgatory, or if we have a real rollover at the index level, the individual stock performance is what clients are paying you for and how you construct that portfolio and how you manage that risk. And I thought the that that scenario in the late 90s of, you know, how you how do you talk to client PMS about participating in a very narrow and concentrated market? That is an undeniable rally, and there’s a lot of alpha to be captured. And it sort of feels like the clients are paying you to devise the most horrifying roller coaster ever, but keep them safe. Right? Yeah. That’s the That’s the job of the technical analysts to responsibly manage that risk when, when indeed those trends come to an end. And John has an incredible, incredible history, lots of great firms and great people that he has worked with, and certainly he’s refined his tools and process very, very well over that time period. So, without any further delay, I invite all of our listeners to sit back and relax and enjoy this conversation with John Colombo’s CMT CFA.

David Lundgren, CMT, CFA 6:31
Welcome to Episode 34 of fill the gap, the official podcast of the CMT Association. My name is Dave Lundgren. And for this episode, my co pilot Tyler wood and I are joined by John globose. John is a CMT and CFA charter holder. And he’s currently the chief market technician at macro risk advisors also known in the industry as M R. A. John is a bigwig on the board of the CMT Association, where he serves as Vice President. Thank you, John. And sometimes somehow we find time to also teach technical analysis over at Brandeis University. As we’ll discuss, he’s worked at several storied companies ranging from Lehman to fidelity. And just as important though, John is an avid guitarist. He’s an avid Star Wars fan. And like the rest of us, he enjoys chasing a golf ball around in the woods. John Carlos, welcome to fill the gap.

John Kolovos, CMT, CFA 7:24
Thank you, Dave. Pleasure to be here.

Tyler Wood, CMT 7:27
That’s even better than walk out music. Dave. That was a that was an awesome intro. John loves you blush. It’s fantastic.

John Kolovos, CMT, CFA 7:34
You guys can see me I’m laughing Thank you very much,

David Lundgren, CMT, CFA 7:36
very nothing but the best for the best. So. So in all seriousness, welcome to the podcasts been really looking forward to this conversation getting you on. I mean, you’ve got so much experience to share with the community, all the different places you’ve worked, clients you’ve worked with, etc. So before we jump into your process, and maybe a little bit of your outlook on the markets based on that process, maybe spend a little bit of time and let our listeners know a little bit about your your background, what got you into the business? And most importantly, what got you along the technical

John Kolovos, CMT, CFA 8:11
path? Sure, yeah. And again, thanks for having me. Hopefully, the listeners will get something out of this today, maybe a little bit of a stream of consciousness. But let me tell you, I got into markets at an incredibly young age, I would say maybe anywhere between 10 years old 11. And I’m in my mid 40s. At this point, I’ve been always fascinated and curious about the economy, about the stock market. And it really came about with my father, my father, being an entrepreneur who’s owned multiple restaurants over the course of his career, you know, good Greek that he is, of course, he had to have restaurants. And I do remember spending. I mean, I was basically raised in a restaurant spending countless hours there, alongside businessman who were there for their Martini lunches, essentially, in the 80s, watching FNN and CNBC. And they would pull me to the side and be like, Hey, kid, you know, pat me on the head and be like, This is how you make money, you know, in the market. And these are people who are showing up and jaguars and Ferraris and whatnot. So it was always curious about it from that end of it. But it was also curious about because my father would always tell me, he was like, son, you know, your day job, will pay the bills, basically. But it’s through investing, will you be able to accumulate wealth, essentially, and allow you to save to go on nice vacations, he eventually was able to put us through college and all that. But I do remember one thing that that really stuck in my head and it was during the first Gulf War, and I was just barely, I think like 11 or 12 at that time. And I remember how, when Iraq invaded Kuwait, he got on the phone right away to his broker, and he was trying to find out what was going on. On and he was explaining to me how the spike in oil is bad for the economy. And he was really worried about it because oil shock would would be would do tremendous damage to a local business like a restaurant like like my father’s. And it sure did happen, right? I remember that Christmas, where I had like one or two presents underneath the tree, whereas the year before Bob was full, I mean, that’s what an entrepreneur is. You’re you’re either feast or famine. And from that young age, I was like, wow, like the economy and the markets are linked, and it has a direct impact on on me and can have an impact on me. Interesting. Yeah. So that’s kind of how I got into the markets themselves. At a young age. I got my first I bought my first stock in 1988. I believe it was, Nintendo definitely was Nintendo. And it was based off the fact that I was really into Mike Tyson’s Punch Out. And yeah, it was kind of like my dad’s way of doing like a Peter Lynch sort of Exactly, yeah. Yeah. Yeah, knowing what you know. And I got that. And it’s when I first got the bug on on buying stocks. Later on, I would say down the road. I would watch Louis Rukeyser show with him and watch Penny Hill afterwards, because it was gonna be right. But that was always fun. It was really my way of so I can watch Benny Hill with him. But that was that was a lot of fun. And I what I remember from those shows, and I think there’s maybe got me into the technicals a little bit hearing about the elves index. And I was like, Who are these guys? These guys sound really cool. So I think that’d be my first introduction to technicals. But I’ll tell you something. This stuff is bad on sound arrogant but a little bit cocky. But it’s relatively easy for me because when I got to high school, I wasn’t a great student, by the way I wanted I had long hair and wanted to be in a rock band and all that sort of stuff. But when I took my economics class senior year, was like the only a that I got and half the class. I was like, wow, like I get this like it was like a blink like I understand markets, I understand the economy. So once I got to college, I was a cut my hair. And I got my first internship by literally handing out a resume and put this in quotes, write a resume. Remember this cardstock paper, you would always have to put your right all right, I was looking at the corner of broaden wall handing out a piece of paper with my name on it and the fact that I sold Cutco knives for one summer or something, right. So there’s one person who was so impressed that I was doing that I wound up getting like an internship at a at a small at a small trading shop. And that was my summer into sophomore year for university. So that was how I kind of got my first step kind of professionally into the markets. But guess what, just like most shops at that time, it blew up even before I had a chance to even start. So I put my tail between my legs. I called my cousin who worked at Lehman at the time and it was an operations gig and he’s like come work with me not a problem all John, you know, you need you need beer, money for school and all that. So I was like, Okay, we’ve got like a day. I’m like, I’m not doing operations. I can’t do it. That was on the fifth floor of Lehman Brothers headquarters. The Sixth Floor was the trading desk. I will go upstairs all the time meeting people seeing what’s going on. This is back then when trading desk for real, right, like noisy people running around like maniacs and screaming and basically got to know people in the summer of 97. I was hired as an unofficial intern, essentially, to work with Steve Weiss. So Steve Weiss, I’m sure many of your listeners know and you guys know, he’s pretty big on CNBC these days on halftime and all that he really gave me my first shot at working on on Wall Street, so to speak, and he was transitioning from another job. And I spent that entire summer stuffing envelopes, doing red herrings going on the first call terminals, doing all those sorts of things, taking orders, breakfast orders, egg and cheese sandwich orders. I mean, that’s a whole nother story. I would do that. And as a slight tangent. I remember I screwed up a breakfast order ones. I remember one guy leaning into me so bad saying if you can’t take a breakfast order, right, or you can take a stock order, right and from that point for stickler about getting orders the right way and being been paying a lot of attention to detail. So anyways, I’m getting to how I got into the technicals made a lot of good connections that summer was asked to come back for the summer of 98. And this is when the defining moment happened. It was during long term capital and the markets were unraveling. And at that time, I probably thought I was going to be like a fundamental analyst or sales traders something along those lines right. And when the markets were collapsing at that time, they would have analysts after analysts after earnings go on top of this go to a podium is Essentially, it was like you’re at church, and they’re standing on top of this podium, talking to the entire trading desk trying to explain what the heck is going on. And he had these animals going out making, I’m telling big bucks, like rock star, and I was going up there saying, I don’t know what the bleep is going on. And sure enough, Steve Shogun goes out there who was there to Chief technician at the time, and was just like, hey, this is how markets behave. Sometimes they crash. And he kind of walked through level headed Lee, just being like, there’s going to be a sentiment of extreme, we’re gonna look like Pokal. Remember going through the different indicators, he’s going to look at to say that we’re going to have a wash out, and then guess what will likely to retest will create some sort of bottom double bottom of sorts, and then we should recover? afterwards? Right. I was like, wow. So that’s when I initially learned that there’s was a disconnect, if you will, between like the fundamentals, what I’ve what I’ve been being taught at school at nauseam, versus what the market was, was telling us. And he was so crystal clear and how he explained it, that I had to go into his office, and I was shaking in my boots and knocked on his door. I’m like, Hi, I’m John. And he’s like, John, please come in. Like he couldn’t have been the sweetest man in the world. And the rest was history. He literally took me under his wing at a very young age, I was only I was still in college, undergrad. And he basically told me what books to get. He advised me to literally drive because you want to get a feel of the markets, John, do your charts by hand. And at that time, I didn’t have to this was in the 90s. But it’s like, do it. So he’s like, do the dow 30 by hand, and I did that did the dow 30 by hand. And then finally, the summer of 99. When I was graduating, I got hired to work on the sales desk. Yeah, I really wanted to work with Steve. But that’s, you’ll see how I got there. I show up and I go, Hey, Steve, I did the Dow 30. And I had 30 stocks, and I charted all 30 stocks. And he goes, what? I just want you to do the index. So I did that. And then eventually, I wound up meeting Jeff De Graaff. At that time, I remember the day I met Jeff, actually. And Steve looked at me, he goes, I have a feeling you two are gonna work together. And I’m like, Okay, that sounds great. And then Jeff had just started in 1998. Lehman Brothers, but Steve retired. And I think Jeff pretty much hired me because I wouldn’t leave him alone. Like, I would be like, Hey, can I help you? Can I help you, I was talking to sales tax doing filming, I was doing spreadsheets it was already calling. I think it was market vein that did at the time that you actually had a call a number was were pre recorded number and they will give you the data. And I would sit there and put those down writing by hand or every Monday going barons and literally just type out all the data that was in the market lab into a spreadsheet. I was doing that before I joined the team. So I think at a public Jeff sanity more than anything else, he’s like, Fine, you can work for me. So that’s how I got into the markets and how I got into charts.

David Lundgren, CMT, CFA 17:59
And in at the time, Jeff, was the head of technicals at Lehman.

John Kolovos, CMT, CFA 18:03
Yes, so when jet when Steve retired Jack tickle. Yeah. And Jeff and Jeff, before that was doing the international product for a little bit. But yeah, he eventually took over. I believe it was in 1998. He took over in 1990. Actually 1999 Yeah,

David Lundgren, CMT, CFA 18:18
yeah. For those that haven’t listened already, I don’t know. Tyler, maybe you can confirm for us. But we had Jeff on as a as a guest. I think in the first year was a fantastic episode. He’s a great guy. Great. He’s one of the best technicians on the street. So it’s definitely worth a listen again. So John,

Tyler Wood, CMT 18:36
you have worked for so many different firms on the street, but you’ve also worked with some of the greatest technicians of our generation and those priors, talk to us a little bit about the genealogy of of where you’ve been and who you’ve learned from along the way. Sure. So

John Kolovos, CMT, CFA 18:51
it’s funny. Yes. So I remember when I introduced JC or Hara to Jeff to graph. See JC or Hara was one of my junior analysts when I was working at at a company called concept capital and eventually MF Global. And when I introduced JC to Jeff, I said, Hey, JC this is your grandfather in technical analysis. And both JC and Jeff were just like, What are you talking about? Like you’re like, you’re completely insane. And I explained to them like there’s a whole genealogy of where where we all come from right so JC is related to Jeff through me essentially through through the technicals Now Jeff, got his got his start really through Steve Shogun, right. And Steve Shogun picked up Jeff because John Roque had left to go do his own thing. Okay, so in some, some form. I kind of relate as a step, brother ish are some steps to do on rope, right. But Steve Shogun got the Lehman Brothers job because Phil lash Phil lash that’s great for them. Phil Roth laughs Lehman Brothers, but all of them Steve and Phil, what did they come from? They came from Merrill Lynch. Okay. And from there Who else am I related to? Remember Gerald. Frank, I share right. Bob Proctor? Steve Nissen, new candlestick guy, right. Walter Murphy, or Crawford of all people. Right, Walter Deemer. Right. He was there for sure. For a little while. George Constantine right. And Dave, even to a certain extent, were related to technicals through years working with Frank Wright and I’m always relate to all that. But ultimately, end of the day, it goes to Dick McCafe. Right. We all come from different people. But I think the number one is Bob Farrell. Right. I think Bob Farrell has tons of great great, great grandchildren and panicles and when at the 50 symposium, it was so awesome to see him there. It was, I mean, I was like missing my Mick Jagger, right. Oh my god. That’s like, Oh my God. And I mean, it was so sweet. But like, I gotta take a picture resume and then I grabbed Frank. Right, because Frank worked, you know, at Merrill, and then I saw Bob Proctor. I’m like, I gotta get you guys all together in picture with me because we’re all related in technicals and Bob real sweet he goes oh, that’s really nice. And practice looked at me like you’re the crazy one right? So and I did that and it’s true it’s I like talking to people and see where they where they came from in the business doesn’t make it right or wrong. But what I’ve learned through that as I think about it, is that you’ve seen it you can people I named who worked at Merrill Lynch at the time you had some like Steve Jobs he’s all about big bases. I love big bases right? But Ferrell was a bad big basis but steepness is all about candlesticks I love candlesticks, right I study them closely. Bob Proctor right obviously into the Elliott Wave. I just started learning about Elliott Wave I’m really curious about Elliott Wave, arch Crawford, but cycles and whatnot. That’s like my new my next new passions, like one I want to learn more about cycles and see what I can get out of all that. So I think it’s in my DNA to want to learn if it was okay for them. Why can’t I learn a little bit about it? So I just really intrigued by it, and I just would just recommend anybody else to like just to continue continue educating yourself on the technicals. He didn’t have to come from a weird genealogy like I came up with, but just keep learning. What is what’s the saying? We say we say it’s a CMT, Standing on the Shoulder of Giants or something like that, like, like, I kind of do that. And I, again, it’d be hard for me to not mention Craig Peskin, who I worked with as well. I worked with Craig when I was at Lehman Brothers. And he worked with Bob Farrell directly, right, right before Bob, Bob retired, and I learned a lot off off of Craig, he would tell me all these things about Bob. And it was just a tremendous learning experience to be around. These people were associated with these people. So I hope one day that JC hires a junior as a junior, and then that can be related to this individual, and so on and so forth, we can continue to pass on this wonderful knowledge base that we have. And I guess that we call it Don’t

Tyler Wood, CMT 23:14
sell yourself short grandpa Columbus, over there at Brandeis University, you’re, you’re giving given life to the next generation. So don’t underestimate your impact both both as a professor but also as, as vice president of the CMT Association lost a lot of new minds being touched. Yeah.

David Lundgren, CMT, CFA 23:34
So once you get your CFA and why did you get your CFA? Why

John Kolovos, CMT, CFA 23:38
don’t I get my CFA? I got my CFA after I got my CMT. And why did I get it? I got it. Because I realized that a little basic, I realized that one plus one equals three. And that there was a lot more to the markets than just squiggly lines. Because when I first started, I remember I got my first Bloomberg terminal. I mean, I put every indicator on that darn thing. Every single one I thought it was the coolest thing and and actually like, doesn’t mean anything like right now. My Chart is just price a moving average and maybe an RSI, that’s basically it. Right? So because because I knew and it was learning at the time, that technical things essentially happen for fundamental reasons, and I wanted to be prepared for that. But also the CFA program. What I found interesting for me, wasn’t the fundamental but like, level two was tough. Like, that was not for me, it was level three action was fun. Can I say that? Like I actually liked taking level three because it was about portfolio management. So as a whole I really liked what it was offering. It was, yeah, I’m super passionate about this stuff. I want to learn. I’m like, Yeah, I’m a glutton for pain. Let’s let’s do this. That’s why the CFA. Yeah,

David Lundgren, CMT, CFA 24:52
in your work today. I mean, do you lean on the CFA at all? I mean, I know you do a lot of inter market analysis and things like that, but it’s it So, from my understanding is your your approach is pretty pretty much entirely technical, right? Yeah,

John Kolovos, CMT, CFA 25:06
I kind of have to be because I don’t want to double count what my clients are reading. So like, so to speak, like when I worked at Fidelity, right, like I was only allowed to stay in my lane do not talk about anything else besides the charts, because I’m hired to be the expert on technical analysis. So I do try and I do stay in my lane as close as I can I do the inter market stuff. Right, but I’m not like reading deeply into the economic reports or anything like that. It’s more about the reaction to it. Yeah, exactly. Yep. But what I do rely on is, is to be a great content on behavioral finance, that was very helpful for me, I do Lean on that still. But the portfolio management end of it, how and I learned this by like, like almost on day one work and fidelity is like to be a stock picker is one thing, but to be a portfolio manager completely different, completely different game. And 98% of my clients are not technicians, they are portfolio my institution portfolio managers. So what I learned during the curriculum kind of really got me into their mindset. So I know I know their language so that way I can then give them given the gospel of Charles now

David Lundgren, CMT, CFA 26:17
super important that’s I got my CFA when it was a fidelity as well and that’s why I got it you know, to be able to speak the language when I want to walk the floors with ideas technically, you know, to be able to at least understand what what they were saying back to me and plus that you said the passion for the business and passion for fundamentals and everything else but at the at the end of the day, when you said double count I would have thought you were going to infer by that was was that I don’t want to double count my own opinion because if I start using fundamentals that’s that’s putting my opinion into the market twice. And we only need it once and if you get a tick tick one opinion it’s better to be the markets than mine. So

John Kolovos, CMT, CFA 26:54
for sure, I mean we have our biases don’t wait right and yeah, even as technicians we have we can have them so it’s it’s it’s incredibly imperative for everybody definitely us to kind of put them to the side and and I still cringe to this day when I see folks politically on the Mac and I’m a man I work at a macro shop but like a lot of macro analysts, they’re just always bearish you know, so I think it’s really dangerous to kind of like already kind of have a bearish tilt of things and then you start looking at charts and you just kind of extrapolate like oh look it’s a death cross and the macro is this and therefore we’re going into a depression know you kind of want to stay in your lane and be as objective as possible

David Lundgren, CMT, CFA 27:30
what do you think the reason is for that Why are most macro strategist bearish? Why is that

John Kolovos, CMT, CFA 27:36
I you know why? Because these folks are so smart. They are so so so so smart that I think they know that this, this doesn’t make sense. The markets really just don’t make academic sense. It doesn’t it’s so I think a little bit, I think you need to be like a little blissfully blissfully ignorant to be in this business. Right? You want to know enough? We don’t want to know too much. Because I think what happens is, is that these folks become a little bit too overconfident, if you will, in their ability to, to forecast or, or they have their overcompensate, I spent all this time studying this, I got a PhD and that, therefore, I know how to do this. No, I think you need to kind of like let them listen to the markets as well. I don’t force your opinion to the market. I think these folks are actually a little. They’re brilliant people. I wish I had their brains to be quite honest with you. But I think that’s what it is. They just look and this doesn’t make sense. And it’s kind of true, like the macro environment for the last 15 years with quantitative easing negative interest rates. Yeah, yeah. Yeah. Bizarre. So I understand their frustration. I totally do. But I think they also just want to be right, and they don’t want to make money. So if you want to borrow that Davis’s quote right now we’ll be right to make money kind of thing. I think they would rather be right. I think people look at us to help them make the money. Yep.

Tyler Wood, CMT 28:56
So is that like enjoying a meal at McDonald’s? Like, if you actually knew what went into the sandwich, you couldn’t actually enjoy your meal? Is it that these trends are so unsustainable, that we’re all just waiting for the heart attack to come our way? Is that Is that what you’re saying?

John Kolovos, CMT, CFA 29:13
Well, I guess so. McDonald’s analogy is pretty funny, because you can tie that into a lot of different things. Tyler, you can think about like, what’s the health of the market the health of the market could be you can see somebody or a market it’s in an uptrend, but the health market is really determined by its breath and etc, etc. Right? So, like me, like I’m relatively healthy looking. But who knows if I’m a walking heart attack or not, right, that’s when you go to a doctor’s check your internals, right. So I think there’s a little bit to that. I think a lot of folks and even the macro side of things kind of miss that. Also, the data is incredibly lagged. Oh my god, right. It’s like, like, why, why? But I get it. I mean, I’m on the sell side for most of my career. I was on the buy side for like five or six years, but you need a narrative to sell things. So I get it. So I understand I understand that part of it. And also to be intellectual about things you do need to think every scenario out. So I’m not trying to dismiss the macro, I use it a lot. I’m going to macro shop last I’m going to do is say it’s not any good. But you have to think it helps you critically think but from my process, it’s the price action first. And if the macros tend to confirm great, where I think most users are the other way, and my fundamental thesis and then once the market is confirmed, then I have conviction.

Tyler Wood, CMT 30:37
Yeah, yeah, we often don’t know the why until much later. And I think the the fragility of what we’re what we’re seeing right now, it seems constant, but it also seemed constant in 2016. Right, Brexit and Trump’s election, and I mean, the Cubs winning the last game of the season, none of that made sense to anybody. And yet markets kept climbing higher. So So do you explore with your clients what that catalyst might be under the hood? Or do you? Do you spend more time just reflecting to them? What what the current situation is?

John Kolovos, CMT, CFA 31:13
Very good question. So at macro, my current position, macro risk advisors, I have many different types of clients wide, a big spectrum, I had to have a hedge fund clients, who may be only putting trades on for a couple of days. And we’re also very options heavy. So but short term perspective, yeah, I got to be aware of what those catalysts are and how the market may respond to San catalyst. And what the setup is going into set catalyst. Right, if there’s market extend in one direction or another is a good risk reward going into that catalyst? Yes, I’m fully aware of it. But again, my other end of the spectrum, my clients are, are long only a good chunk of my clients a long, long these. And they’re not day trading. Right. For them, it’s more about okay, what was the reaction to the Fed? What was the follow through post? payrolls? Right, those sort of things. So I, unfortunately, my head is spinning in my current role where Yeah, I do have to pay attention to the short term Wiggles, because I have trading accounts. And my long only is not so much. It’s more about telling me when I’m going to be really, really wrong. Yeah.

Tyler Wood, CMT 32:23
fascinating observation that that you can use the same exact Technical Toolkit on all of those timeframes serving clients who are holding for two days and those who are holding for two years. Yeah.

John Kolovos, CMT, CFA 32:34
Don’t tell people that easy. Okay. No, but it’s so true. Right? What is the fractal nature of a markets, right? That’s exactly what that is. And it’s a trend is a trend as a trend doesn’t matter. It’s in a one minute chart or a one year chart. And

David Lundgren, CMT, CFA 32:49
that’s across asset classes. And it’s all across geographies and public and private. You know, it’s all the same thing. It’s all trends, reflecting fundamentals, you know.

Tyler Wood, CMT 33:02
So let’s talk a little bit about your toolkit. You mentioned on your charts, you’ve got price, maybe some trend lines are moving average. Why so simple.

John Kolovos, CMT, CFA 33:12
I think goes back to your previous questions, you really want to know what’s going in? Really, really, really want to know, just see the golden arches. I’m just happy. Yeah, I think I learned that and I still struggle with it. There’s a lot up here in our heads, and we want to convey it to clients. But do they really need to know that? Behind the scenes, I have probably like three or four models that are driving the output of what you’re what they’re looking at? Am I really paying that much attention to the 200 day moving average? And I tried to keep it simple. So I can just be able to communicate my views to them. But at the same time, isn’t that what it’s about? Right? Like we don’t want to overthink things. So basically, when I was just asking what I looked at it basically chart when I published stuff, it’s very clean. I know Dave used to see it right. It’s like price s&p chart is s&p as it is 5200 Moving Average and an RSI, maybe an MACD here and there right but that’s basically what goes on behind right our trend models, breath models, sentiment models, right multi composite models, essentially a lot of a lot of good going into that sausage, cycle work Elliott Wave work the market, you name it, it’s all in there, but do they need to see that and Big Core a big part of my process. I consider myself like a techno quant like I adhere to the traditional technical analysis rules if you will, like very much Charles Dow and all that. But being systematic about it, have been able to have a repeatable process about it. Have your indicators they back tested and dispelling myths and all that. That ready to go have selection tools is not a guessing game. It’s a probability game, right? And you want to be able to, to be able to convey that to to your readers. So I do keep it simple for the reader. I think that’s important. But there’s a lot of work. There’s a, there’s a technical mosaic, if you will, going on behind the scenes. It’s

David Lundgren, CMT, CFA 35:17
mostly like, I know you said quite, but it’s more. It’s like systematic analysis versus all those things that you just mentioned. And doing all that analysis subjectively, you actually have built models to assess all these different things.

John Kolovos, CMT, CFA 35:32
That’s right. Yeah, that’s totally right. And you can even throw in factor work as well, it’s probably the closest ornamentals that I’ll do is to study the trends of the of the various factors, right? Because at the end of the day, we want to fish in the pond where the fish are kind of thing, right? So that’s the extent of my fundamental work, what I’ll be looking for cheap is one meal values outperforming growth or something along those lines, and I’ll dig deeper into the different value factors and say, Okay, well, let’s, let’s hone in on those. But if I just may just try to just bring it back a little bit, in terms of processing my history. And I had tipped the Jeff, I will tell you when I started working with him, and officially in 99, officially in 99. He said, look, listen, we need to dispel myths and technicals. I want to he wanted to get rid of the Purple Crayon, so to speak, of people just drawing head and shoulders on charts and double bottoms and stuff. He’s like, we need to quantify what we’re doing, we need to put numbers behind what we’re doing. And I and I think he was quite early on that. I know Ned was doing a lot of that at that time, too. But I think Jeff was might have been one of the first both bracket guys that was doing that, like we built tremendous databases at that time. You know, I think everybody has them now like percentage stocks above moving averages and new highs and new lows, and correlations and stuff like the bottom up databases. But we were doing that in 99. And in 2000 on the entire Guix universe, right and taking it back in time. So a big part of my process from early on was to quantify what we’re doing. Don’t Don’t take my word for it is basically what he was going for. And, and still to this day, and he’s had a tremendous run doing that. I think he’s probably probably more data scientists than anything else at this point. But yeah, hats off to him for doing that. And I and was huge for me for being able to work with him. And to learn that from him. And then to carry that on in my work today.

David Lundgren, CMT, CFA 37:32
Yeah, that’s great. Do you know I saw this chart chart, the other day of it was the enterprise value, I think it was of the Magnificent Seven, which is the seventh largest companies that have kind of driven the s&p higher this year. And it was basically the economic the enterprise value of those seven stocks divided by GDP. In over the past, I don’t know, I can’t remember how long it was. But it’s probably the fat five years or so. There’s this massive head and shoulders top. And this macro strategist was pointing out this massive head and shoulders top on the enterprise value of these Magnificent Seven, relative to GDP. So you know, so the question, obviously is, you know, do you think you can do technical analysis on fundamental data like that? What do you think that’s another example of technical analysis? There’s used? Sorry,

John Kolovos, CMT, CFA 38:25
Dave. Yeah, there’s a few things that come to mind. The second you say that one is stay in your lane, right. So I always get nervous when macro folks or fun or non technicians are leaning on technicals to make their call, right, it’s like, this time of year, it is the season for seasonality, right, like everybody’s an expert in seasonality at the end of the year, right. Everybody knows that. They just kind of like, if you go through your entire list of reasons to be bullish, and you can’t find any except for being for seasonality. It’s like, that’s kind of cringy. Right. So that’s, that’s number one. But can you do technical analysis on fundamentals? Well, how about this, if it trends, and you have a systematic or objective way to measure trends? And you notice a trend change in that data series? Why not? Why not maybe doesn’t fit the criteria of it having proper behavioral reasons for why it’s moving? Right. But if you taught this at Brandeis, the checklist of trend change approach, right? You follow many, many steps to identify a trend change. If there’s an economic data point that has that? Sure. Why not sure why. I just get a little nervous with this guy or gal, whoever doesn’t matter is saying head and shoulders on economic data. I’m like, oh, maybe stay in your lane because you want the best patterns. Yeah, fill that in shoulders is the best pattern. So we’ll see if that happens on that. Right. This

Tyler Wood, CMT 39:52
is a debate that gets my backup all the time because the when you go back and read Edwards and McGee what they’re talking about in price patterns is is visualizing behavior in markets, right? So if we’ve got consolidation and then resuming an uptrend, forget what you know flags or pennants, whatever pattern we’re talking about, what they were looking at was a way of seeing how markets were digesting investor behavior. And all they’re pointing out is, look, buyers are back in control. And what we see, you know, shorts get covered, everybody moves the same side of the ship, we can all conclude that now the trend has resumed, and everybody piles into that side of the trade, adding velocity to the move. That doesn’t, that that behavioral element doesn’t happen on macroeconomic data, seeing trends in any dataset that that makes sense. And, and that trends might persist in a direction. certainly makes sense. But I think that the super low barrier to entry for people calling themselves a technical analyst today is I mean, it’s, it’s scary, right? 2021, how many tick tock traders came onto my Instagram reels saying, bro, just buy when the line goes up, just be TFD every time it dips, you know, just put more money in there because it only goes up. It’s super irresponsible. Yeah. And I think there’s, I mean, to your point, John, 25 years ago, you and Jeff and other really responsible technicians were putting evidence behind what you’re observing, quantifying the way that the tools work and the probabilities with which they’ll continue to work. I mean, that’s, there’s so much more to it. And I think that, you know, God bless charting packages that are out there, because everybody has access to the same price data and a lot of these really powerful tools. But, man, it doesn’t take a whole lot for somebody to spot a head and shoulders top. And most of the time, they’re not waiting for it to break the neckline in the right shoulder and see that it’s actually followed through. So down my diatribe there,

John Kolovos, CMT, CFA 41:51
yeah. Yeah, yeah, break it down. And you have your throwback to resistance a whole way that it goes. But Jeff said, and I agree, and I say this to folks, we got to get rid of that Purple Crayon. Right? Yeah. Can’t just be squiggling on stuff and seeing what you think you see, because if I stare at a cloud long enough, I’ll see turtles and elephants, I’m sure if you stare at a piece of graph paper long enough, you’re gonna see something. Right? Yeah. But even still, like, like, I’m not trying to dismiss patterns. It’s it’s part of the mosaic, don’t get me wrong. It’s part of the mosaic. But there are rules that go with applying those patterns, right? There’s there’s ways they break down. There’s ways that they behave, there’s there’s measured moves off of them, all that sort of stuff, right? You want to weigh that into your thought process. That’s up to you. Right, but even those have steps involved. It’s not complete guesswork. And I think I think a lot people lose that when it comes to what we do. They just think we’re almost guessing it. But behind me, and I know, this is a podcast, and we could say I have a book of almost like a library of technical analysis books behind me, right? There’s a huge body of knowledge that predates all of us. So

David Lundgren, CMT, CFA 42:57
anyway, the idea is that that body of knowledge is essential for a base understanding of what markets are about what technical analysis is, how to use it properly, and all that. And without that base understanding and base knowledge, you can’t systematically do anything, if you start doing things systematically, and feel good about that, because you’re being scientific, consistent, systematic, but you actually don’t know what you’re doing. That’s not helpful at all, you need to know what you’re doing first, before you start building models around that knowledge or lack of knowledge. Right?

Tyler Wood, CMT 43:27
Such a good point, everybody, everybody can code in Python. But everybody needs to go back and listen to John volunteers episode about understanding the first principle. Yeah.

John Kolovos, CMT, CFA 43:37
So true. And I don’t know where you want to go with this. But I want to tell you one thing that what first came to my mind, as you were saying, and I struggle with this today, still, with new traders and just even seasoned vets. It’s context is key. It’s one thing to be oversold. It’s one thing like the marks are very, very popular. Now. It’s one thing to have like a 13 Nine combo going on. But where’s that happening? Right? Is this happening at an area of support? Is it happening? It’s still in an uptrend, right? Like, in context is being I think a lot of these quant models, they just kind of bucket stuff. But they don’t take into consideration how it got there. The speed in which it got there. And and what what I always say my favorite model, my favorite multifactor model only has two variables. It’s my left eye and my right I overlay that in your work, right? So you can spit out and I have multi factor models, but I still have to run it through the last model, which is my lifetime. Yeah, that’s

Tyler Wood, CMT 44:36
such a good, such a good answer, John. I think I threw Ari Wald, a curveball. And I said, Hey, with all this quantitative evidence, what why do you need the chart? And you just said it, the context is key.

David Lundgren, CMT, CFA 44:49
Yeah. So let’s, um, let’s do a quick overview of your process like what are the things that you look at in from a day to day perspective and then from there we can transition into, you know, based on that being your process. What are you seeing today? Let’s see if you can help us sort of navigate the window of time we’re in here.

John Kolovos, CMT, CFA 45:09
Okay, you got it. So what I’m what I’ll try and do is and cut me off, because there’s a lot, there’s a lot going on up here. What I will try and say is this, I try to marry, top down and bottom up technical work together, right? Yeah. And there’s, there’s a few things in my philosophy that I really, really believe in. And I think maybe first we’ll just talk about how I call the markets. And then I think a separate conversation will be how do I pick stocks? Because I think they’re completely two different processes altogether. They’re related. They overlap. There’s a Venn diagram where they overlap. But I think that I think they need to be separate. So when it comes to like, the day to day in the market stuff, yeah. From a top down perspective, we’re looking at trend, right? I have trend models, what’s the primary trend of the market, etc, etc. That’s number one, you determine what the trend is, I’ve multifactor model, what does it do? What does it capture? It captures Moving Average crossover slopes, moving averages, you name it, it’s about six different variables in there. Number one, I wonder what the trend is? That number two, the next step in my whole processes is like, where is where’s momentum, right, because you can have positive or negative in a downtrend and vice versa. So I have different types of momentum, what momentum is there, there’s price momentum, and there’s breath momentum. And it’s two different things. Right? Potential stocks above a moving average is the momentum of breath. That’s how I categorize that. Whereas the advanced decline line is the trend of breath. So I have to study those to come help me confirm what I see on the index level, right? So I have trend on the index, then I look up momentum, whether it be price based or bottom art based, then of course, I look at sentiment. And again, what people say and what people doing, you have your surveys aim, I borrow that. And then I look at what people are actually doing through the options market put call ratios, the VIX curve, flow data, etc. Right? Now you keep going down a little bit further, the macro macro, I lean on the macro quite a bit, call it into market analysis, call it cross asset research, right, your technicians got that stolen from them, it’s really into market. But you do that. And from there, I lean on it a lot, because it’s probably the closest to the fundamentals, I’ll get to my market call, right? Because macro is a form of fundamental analysis, right? So when I studied the trends of interest rates of gold or oil, you name it. That’s important, right? The direction to point but the second part of that is what is the volatility of those moves within the macro? Right? What is the level of macro uncertainty that is out there and and that’s hugely important right now. Because when macro uncertainty is low, and starts to rise, and increases the probability of a left tail event, okay, so like for a while now, for about a good year or so your rates have been going wrong way, Goldman, right. What’s going wrong way, but it’s been relatively orderly. As of late, the volatility those moves have picked up and people gone. Oh, boy, you know, what’s going on? They’re waiting for that mistake. Doesn’t mean it’s gonna happen. But the odds of the mistake have increased. So as the s&p is now starting to break trend a little bit. Gotta be careful on the index level that something’s happening behind you know, stocks already are a disaster. Right? I always act like a complete disaster. At this symposium, I gave a little spiel, and I remember the whole room was like, trying to be all bullish about the bull market. And I’m like, can you pull up a chart of the Russell three advanced decline line? And it was like a hum silence across the room? Was it was at a new low, and be like, what’s going on? I’m like, because the market is broken. Right? There’s something wrong here. So that’s that. So that’s kind of like my top down, then I go ahead and do almost the same exercise on on the sector’s you kind of go down all the way down to that’s essentially it. So it’s my market stuff in May.

David Lundgren, CMT, CFA 48:50
So when you when you do that, do you have a bunch of inputs that you systematically follow? And it’s probably the same models week to week? Do you have a like a summary indicator that says these are the 15 or 20 relationships that I monitor? Have these 15 or 20? Relationships? Five of them are positive 12 of them are neutral and the rest are negative. Do you do that as a composite? Yes, I

John Kolovos, CMT, CFA 49:13
do that as a composite. I do do that as posit. It’s but what it is they’ve is it kind of sets more of a conditional backdrop to how the environment is right. It kind of tells you like your context in your life, it’s helped me can talk leaders into portfolio and stock selection kind of lead you into a little bit about what your exposure may be on a portfolio level, right? If all this isn’t so hot, why am I fully invested in the market or vice versa? If the markets are giving me signals, but even though the economics isn’t saying it’s so good, maybe I should have more exposure? It sets the tone more than it does necessarily the call right there. There could be other elements involved there. Yep,

David Lundgren, CMT, CFA 49:59
Okay, and so systematic, bottom up top down. Similar, you know, you and I talk about this a lot. And you know, your your writing style is very similar to mine, your research process is similar to mine. So a backhanded compliment to me is that you’re awesome. So, so when we, when we go through that process, though, what do you find today? And what do you try to? How do you how do you convey? I mean, I know the answer, because it’s truly mixed. And it’s very disconnected. You talked about your comments, which I remember at the symposium when you talked about how everybody’s bullish about the average stock is kind of falling apart. So there’s, there’s that observation that can be made. But then how do you translate that into a an action plan for a portfolio manager who has to try to beat a benchmark that’s going up because of seven stocks? Sure.

John Kolovos, CMT, CFA 50:51
Sure. Sure. So that’s a fantastic question. So I think with this current environment, right? First, you have to educate everybody into an external extent, what is breath really means you go through that whole process. And it’s not just the RSP. I’m glad the RSP was invented. At first, a technician invented the RSP, because it’s really an ETF for breath. Right. But I’m glad that it’s there. So what I tried to do is I tried to give them historical examples of when we had negative breath or versions that you kind of you have, we have to give them context again, right. So the most recent kind of ish examples, such a negative breath divergence was, of course, the 1999. It’s very similar as to what happened in the 90s. Some would even say that, we’ve never seen it this bad, okay, it’s possible, right? But you’re also gonna look into seven days from breath was pretty darn bad. And four days breath was pretty darn bad. And what I found is just like economic data, that breath can have a long and variable lag would take a long time for it to resolve. And it often resolves poorly bad, right? So when the 90s Yeah, everyone was right for saying that breath was bad. But from the low rent the long term capital and 98 to the peak in March 2000, this B went up like 60 ish percent, like, you had to be careful in terms of how bearish you were going to be at that time. But since most stocks were going down at that moment, right, your portfolio construction is a little bit different one, you needed to be involved in those that were working, you had to be, you can’t just fold your arms there, I’m not doing this because breath is bad. No, you need to own those, you need to own them in size. Okay. So your exposure levels are there, you’re maybe not as fully invested, because most stocks are going down, but you’re still needed to be in those names like right now, you need to be needed to be in the Magnificent Seven. The other end of it is, is that you have to tell your clients that now since your portfolio is is concentrated, you’ve now increased idiosyncratic risk to your portfolio. So now, any of those one magnificent sevens have to crush earnings have to do everything right. Otherwise, it will go down and the index will go down and then scare the bejesus everybody even more so. Right? So it kind of leaves into your portfolio construction, but just be mindful of what the risks are. And that increases idiosyncratic risk. So hopefully, that kind of answers that question like, how do you convey those things? So it’s history. Lean into what is working, of course, but with that comes risks. So the next part of the breath argument is is like, I wouldn’t be surprised next year, that this resolves, and down s&p, and up RSP and IWM. I wouldn’t be surprised to see that, because that’s how it resolved in 99, essentially, where the mega caps caught down, and everybody else was done with their bear. And they went up. I wouldn’t be surprised to see that. And I don’t know, folks are really prepared for that. Because we think kind of binary all up all down. Yeah, that one would be one scenario that I think maybe we do need to pay attention to. So we get a bear market on the index level, but we got a stealth bull underneath the possibility. I think that’s one thing we need to concern.

David Lundgren, CMT, CFA 54:01
Yeah, I wonder, you know, the whole comparison to 99 I obviously, I completely understand that. And, and, you know, like you manage through it at the time. And so I know exactly what it felt like this feels a lot like it, but there’s a lot of things that also are very different from 99 in the sense that you can make the case that the whole 99 Blow off bubble thing happened in 21. It’s, that’s already done. It’s already over, it’s already uploaded, ark went down. 80%. And, you know, that’s that whole bubble and unwind has already happened. And so now from that perspective, we’re kind of in a weird, you know, post bubble environment that where most stocks are still suffering the overhang of that of that bubble unwind. And the these mega cap names, you know, I refer to them as toothpaste Tech because they have these recurring revenue streams just like toothpaste. And so they one of the reasons they’ve done so well is because today portfolio managers flocked to Microsoft, just as they used to flock to Procter and Gamble 1020 years ago, right? So then I wonder, because everything is similar but different. So it’s different enough that you have to obviously be open minded as you always have to be. But I think we may have talked about this, but what do you think about comparing today’s environment to 94? Where we had a horrific bear market and bonds, bread got absolutely annihilated, there was arguably, it was probably the worst bear market like real bear market since the 70s. You know, underneath the surface in 94, in the s&p never went down more than 10%. And that divergence result upward into what became the bubble of 99. What do you see any of that evidence? Do

John Kolovos, CMT, CFA 55:39
you see any of that I think that this would be the bullish way out of things, right? It would be this scenario that was at that time, the fastest or the second fastest fed hiking cycle to time, right. So they were really slowing things down. And after the market broke out a little bit, they they started realizing, Oh, my God, I think we’re gonna run into a recession. So they actually preemptively cut rates. And I think early 95, correct me if I’m wrong, I don’t determine for me, they preemptively cut rates. And that is kind of the hope. I think you’re right now that folks are seeing in the market that they’re going, they just signaled that they want to stop. Right? I think that’s why the markets are rallying right now we’re know early November, markets are starting a nice little rally here could be seasonal, it could just be deep oversold. But the narrative, at least for the last day or so has been other done. Okay, now the hope is they’re gonna start cutting now. So they’re gonna cut for one or two reasons. One, they preemptively see the recession, let’s get let’s get ahead of this. Right. And my, my professional opinion is they should, because what we see with negative breath are banking stocks are ready to go out of business, they need to knock it off, and start cutting rates and be pre emptive. But doesn’t sound like they’re trend followers to they’re going to follow the data. So I kind of think like, they’re going to follow the doubt. So until the Dow goes down, 20%, they’re probably not going to cut rates. So that also puts us in that scenario of where they usually do is they cut rates to stem, a recession in STEM, a bear market, but that’s the analog day that I’m thinking of, I think that’s the way out of this, the positive resolution out of this is they start cutting preemptively to stem some sort of macro mistake, ie a banking crisis. You

David Lundgren, CMT, CFA 57:20
know, it’s just the the idea that you just said that the essence the Fed, maybe like triggering off of the market, which, you know, actually, if they did, if they actually did do that, I’d say good for them. Because that’s not a bad thing to trigger off of. But But herein lies the conundrum on that, because we just had this extensive discussion about how the s&p is saying one thing, and that’s probably what they’re keying off of with the Dow or whatever. But the reality is, the average stock in the market is prior to today anyways, 29% below its bull market peak 29%. So the bear market that the Fed might otherwise signal off of to say, Okay, we got to, we got to ease off on his tightening is already underway. And it’s been going for almost two years now. And so they’ve actually been maybe missing the boat in the sense that the bear market that they’re trying to cause in equities has been going on for two years. And they just don’t see it, because they’re focusing on on the Dow and whatnot.

John Kolovos, CMT, CFA 58:12
Yeah, so we need to send breadth indicators. That’s what we need to do.

Tyler Wood, CMT 58:16
So we’ll make sure to include in the show notes for all our listeners, I just pulled up the Value Line geometric index, I know you love to look at a Dave, John, you reference the RSP. But it’s, it’s screaming off the chart at me that we’re right at what has been support and resistance, right, the polarity concept, all through 2019. Lots of support right here at this 505 20 level. And to your point, Dave, Value Line is down from from 700 to 500. Since that peak in in the summer of 21. To your scenario planning, John, right, the stealth rally underneath the hood, even if the top line, large cap indices continued to crater from here, then we could we could see a stealth bull market in the average stock pulling up from what is a really clear support level, it was support back in October of 22 as well. John Wooden when you do all of this scenario planning, I’m often told that markets move in three directions, right, up, down or sideways. Is there a scenario where as David pointed out, like, we’re in this post bubble collapse, but not not really, you know, bear market so much anymore? It’s it’s super indecisive. What if this purgatory continues? Could it continue?

John Kolovos, CMT, CFA 59:39
I think that’s another one I think is another important scenario and I think it’s probably the most likely one because my biggest worry is that we are heading into some sort of secular bear market of sorts on stocks a maybe last decade or half decade if you will, I don’t think it’s necessarily going to be as bad as the last one and and the environment that that I think got the most akin to it would be between 1946 and 1949. If you were to pull up a chart of the Dow between that timeframe, it went nowhere during that entire environment, the advanced decline lines, the New York Stock Exchange was in a steady downtrend during that period. It didn’t bottom to 1949. So I think we could be in a scenario like that, and I do. What bothers me besides the breath is how strong commodities have been so from a secular standpoint, when commodities are in a secular uptrend, which I think they are we can debate that but like oil going negative, that’s like a low right? So they don’t overlap for very long periods of time. I’m talking secular trends. So when stocks are under secular uptrend, commodities tend to be in a secular downtrend. So now we have this overlap going on, and we’re going through a tantrum. I think this does transition between all right, commodities are about to confirm their sexual uptrend, maybe it’s oil at 120. Right? And then they make that final on rattles markets, so on and so forth. So I that’s what I worry about is the timing, the secular trends and how they relate to, to to commodities as well.

Tyler Wood, CMT 1:01:14
So to bring that point to the equity investors out there, do we need to start looking outside US borders for opportunities? I’m heavily biased. I just got back from from India, in terms of an economic growth and an entrepreneurial spirit and broad participation, down the cap scale, in the Indian equities markets, it seems very, very different from the very narrow leadership that we’re seeing in the US. And we’ve seen Brazil outperform we’ve seen a lot of these countries that have a a much closer reliance on the commodity space starting to outperform, do you give any stock to looking at global equity indices?

John Kolovos, CMT, CFA 1:01:54
I gotta be careful, because a lot of my clients are international guys. If you’re a US investor, now, I don’t think there’s a strong case yet to get over your skis. One, you got to be mindful of currency. So if you can hedge your currency exposure, sure, like Japan looks great. But if you but on $1, US dollar basis, Japan’s not that awesome. It’s really not if it’s not that good, either on a US dollar perspective, so you’ve got to be mindful of your currency exposure. So that’s number one. I China, and China, the Chinese markets are broken. They’re their alpha, what is the destroyers for the last 15 years they haven’t outperformed, the Spark has not outperformed. Any real basis and we will talk about a terrible breath line. Just as bad as NASDAQ Composite, it always goes down. Right. It’s just littered with companies that just show up one day, and they’re gone the next. Yeah. So it’s really hard for me now, to say yes to do that. Yes, there’ll be opportunities here and there, of course, but I would say in the grand scheme of things, I don’t see it yet. I would like to see it. Yeah, I don’t see it quite yet.

David Lundgren, CMT, CFA 1:03:03
Maybe before we transition to like our final questions, I have one more question for you. Beyond my this one, which is to just ask you to sort of for our for our listeners just summarize then what you’re what you’re thinking what you’re telling clients. So it’s kind of a quagmire? Not really clear bull or bear or what do you think in what’s leadership? What sectors? Are you favoring? Note? You don’t have to talk stocks or anything? Because I know you can’t. But yeah, well,

John Kolovos, CMT, CFA 1:03:25
I think what we’re looking at for the next three to six months is this, okay, we’re at the end of the year, it really does look like that sentiment was washed out enough. And momentum is washed out enough that we could get some sort of urine laggard rally, that’s kind of what it’s starting to shape up to look like. But on the index level, it’s really difficult to see a sustained gain without the macro really supporting things. And I think those trends trends are gonna be really, really sticky. So from an s&p perspective, I’m not really terribly all that excited about it, maybe the s&p gets to 4500. by year end, I have a hard time seeing it sustain that. And again, my big worry is that the s&p is not only going to test the march lows, which is somewhere around 3800, that we may have to come down and retest the October lows. But again, that’s crystal ball stuff. I don’t want to do that. But that’s just kind of where things are kind of lining up ish right now. So very cautious, more likely a seller of rallies as things progress, in terms of groups and whatnot. I think, for until year end, like I said, I think there’s a laggard rally coming in. They’re starting to show up. I know I don’t like China and yet, but that’s a laggard area. Em FX is starting to perk up that tends to be a tailwind for emerging markets. So I think that that may be something for year end. But again, bigger picture still like energy. I still like parts of industrials, still parts of financials, not banks. I like like those areas quite a bit. underweight health care in aggregate, under underweight communication services and utility He’s Are you?

David Lundgren, CMT, CFA 1:05:01
Are you a buyer of this? Head and shoulders bottom on the ark fund Ark ETF? It’s

John Kolovos, CMT, CFA 1:05:09
interesting, buddy. Yeah, it is. I mean, I love I like I love big bases and I cannot lie

David Lundgren, CMT, CFA 1:05:16
to your base. It’s

John Kolovos, CMT, CFA 1:05:19
just what you don’t want. It’s a good risk reward, right? So like, let’s not try and like gasp like pick a side and trade it right. So I like that idea that it is a head and shoulder and then you follow checklist to trend change approach and all that and say, Okay, how am I going to build conviction in this position? Because end of the day, we don’t know. Right? And this could actually be a major inflection point for those stocks, like to your point date, they already did their bear market. They made it there doesn’t appear to neglect the NASDAQ went nowhere for a very long time until the GFC. Right. Yeah, we’re doing with those, you know, they’re they’re great companies in there that I think we’re in the future. But maybe as of right now, not so much. I mean, don’t forget Amazon. What went down 90% During the tech when the tech bubble burst, but revenues continue to climb during that timeframe, but it was just market didn’t want to own a stock like that. And perhaps that’s where the some of these guys are right now. Is that there disruptors like Amazon was, but it just the markets just not ready to appreciate them quite yet.

Tyler Wood, CMT 1:06:19
So John, we’ve been talking about your top down approach, understanding where where markets are trending. But let’s let’s take it from the other lens bottom up, how do you do stock selection? What goes into the portfolio? What are the criteria?

John Kolovos, CMT, CFA 1:06:30
Sure you got it. So the first thing I learned when I was at Fidelity was that buying breakouts is a bad idea. I was coming from the sell side and it was all about fresh breakouts, right. It’s like, oh, I want to buy this beautiful chart. It was a disaster. I couldn’t have been more wrong. And what happened at Fidelity how we got paid. We got paid on a ratings or buying sell ratings. We also had a portfolio of very small portfolio, right? And the reason why they give you a portfolio was just because can you actually think like a portfolio manager is one thing to say buy or sell. But can you construct a portfolio? Can you think like the PMs who are who are our internal clients, right? And what I learned pretty much like day one on the job is that there’s a difference between trend and momentum. I don’t think trend following works all that great. When building a stock portfolio trend following works fine. When you have a diverse set of assets, right? If you’re just trading, currency futures and stock futures and bond futures and other right there, they move on to the net highly correlate, but stocks, they are incredibly correlated. So how do you build a portfolio with technicals? I can say that it’s more about momentum, it’s more about relative strength. Right? So if if the market is in an uptrend, right, and you have higher exposure? Sure, let’s be in the top quintile of stocks, right. Let’s do that. So I want to live in that top quintile, whatever ranking system you have I have a ranking system is very similar to the momentum factor. I want to be in there, focusing on those ideas. But number two, I believe in building a core satellite portfolio, you have your long term winners, then you sprinkle around diversifier, it’s a column chart diversifiers. And then these charts diversifiers. These are ones that haven’t been connected to two week lows, but they’re kind of basing and they’re, they’re kind of waiting their turn, and you tilt a little bit more towards them. When what when volatility is spiking, VIX is very high 30 ish credit spreads. Right? This is when you’re allowed to buy bad chairs, because the big problem with trend following is that it lags where when the trend bends trend is your friend until it bends that bend is no way to get around it. But you can try and mitigate that drawdown. So I think having chart diversifiers in there, that might not necessarily be the top quintile issue of your momentum model, whatever, you have to have some of them in there. Because when things do turn, guess what those guys will help offset those that are ready to roll over. So I tried to make that distinction between trend and momentum when I when I select stocks. So

Tyler Wood, CMT 1:09:17
there’s like a built in hedge to your portfolio construction.

John Kolovos, CMT, CFA 1:09:21
Yeah, to an extent Yeah. And exactly that. And then also you need to take into account volatility, right. So you look back period has to change as well, when markets are very volatile. You need to shorten your look back period to what should be considered in your portfolio or not when things were really great and hunky dory. Yeah, you kind of let it let it breathe, let it let it do its thing, because the look back changes. And I think folks really are the clients, they don’t see that they keep things static, want to do a 12 month look back or a three month right? I think you need to adjust that that needs to be dynamic, as well. So

Tyler Wood, CMT 1:09:56
that was another another question. I was going to ask you Talking about the VIX curve or looking at volatility measures. I’ve had a bunch of conversations just over the last month with people who don’t really trust the VIX numbers as well anymore because they’re masking some of the volatility because markets are moving faster and I spent some time with Matt Moran from CBOE talking about their new nine day vix and looking at a at a different instrument to get a sense of that volatility. Do you have multiple vix measures? Yeah,

John Kolovos, CMT, CFA 1:10:28
so I think one thing you got to realize with vix there’s nothing wrong with VIX. VIX is not broken. Okay. vix 80% of VIX is derived off a Realized vol off of the rate of change itself. Right? So VIX is almost the absolute rate of change of price. This is basically what it is. This decline that we’ve had, right has been orderly. We’ve haven’t had very many back to back one and a half or 2% days or habitat has yet to be a waterfall. people’s personal VIX is at eight. Portfolios looks like crap, because the average stock is trending the wrong way. Yeah, but the actual vix of the market ain’t that bad, right, because it’s been an orderly decline. That actually could be a bullish argument that this has just been a low vol higher trending market essentially right where vols contracting you’re creating a big bull flag and the market rips and volatility expands again, but I don’t know if it’s necessarily broken. Now again to How do I look at vix I think spot VIX is the wrong way to look at it. You got to look at the futures for it. You gotta look at the first contract on that spot. vix doesn’t trade, right? There’s no psychological component to that number number two, you look at the curve. Yeah, VIX, Aviva month and maybe second and that inverted very briefly about a week ago. So where are we now in November 2, Ash was right around when the market bottomed when it came down and just undercut the 200 day moving average, the s&p that is a useful signal when the curve inverts.

David Lundgren, CMT, CFA 1:11:54
Brilliant. Okay, last last question. For me, I like to I like to dig into hobbies that you that you’re maybe hobbies or other things, you know, interests outside of markets, just to see if you can share any lessons learned while deploying your interest into that hobby. And I think anybody that knows you well knows that you’re a huge Star Wars fan. So you know, what is Yoda taught you about investing in trading? Luke,

John Kolovos, CMT, CFA 1:12:22
really gone this way. All right, fine. We’ll talk stars. No, you know what, I think Star Wars. You can learn a lot from those movies. Yeah, it’s very philosophical. Incredibly, so a couple of things I would say is, is that remember, there will always be dark times, okay. Don’t back down. Don’t give up your dreams. That’s one thing. It’s one thing I’ve always learned from Star Wars, right? Don’t give up on those and be rebellious. Right. And as overwhelming as things may be, remember, size matters. Not right, stay on target. Stay balanced, and don’t get into hate. Right. Don’t be overly emotional. So when it comes to investing, right, who would be a good stock picker? Right? It would travel outside to see Threepio. Right? He would be pretty good. Because he knows he knows all the odds. But he’s got no, he’s got no human feeling to it. So I don’t think we want he wouldn’t be great. It would probably be something like Yoda, because he’s also clairvoyant. We like Yeah, right. Yeah. But he’s not like Kylo Ren, who is emo and freaks out all the time. Yeah. And it wouldn’t also be Han Solo, because Han Solo is a gambler. Right? So we wouldn’t want that. So that’s, that’s what I would learn from from Star Wars. Well,

Tyler Wood, CMT 1:13:34
John, as we wrap up today’s interview and let you get going here, markets just closed. And I know for all of our listeners, they’re going to be on the edge of their seats and thinking about how they’re going to manage risk effectively and responsibly. Here through the end of the year. Really appreciate you spending some time with Dave and I, and looking forward to seeing you very, very soon, my friend.

John Kolovos, CMT, CFA 1:13:57
Thank you very much for having me. I enjoyed it.

David Lundgren, CMT, CFA 1:14:00
Thank you, Mr. Vice President.

Tyler Wood, CMT 1:14:04
Yeah, technically, you’re our boss, right? Yeah.

John Kolovos, CMT, CFA 1:14:06
Yes, not

Tyler Wood, CMT 1:14:07
at the bowling alley. That’s where we own you.

John Kolovos, CMT, CFA 1:14:10
Why do we have to go there? Why do we have to go there but

David Lundgren, CMT, CFA 1:14:13
at the end to end with

Tyler Wood, CMT 1:14:15
that, ladies and gentlemen, I look forward to seeing you all at the next episode fill the gap, the official podcast of the CMT Association. Thanks so much, John. fill the gap is brought to you with support from optima. In addition to candidate study of the official CMT curriculum. Optimum provides a full video course on all of the material that candidates need to know for each level of the CMT exams. Each course is broken up into modules ranging from 15 to 45 minutes depending on the complexity and length of the topics being covered. Learn more@optima.com

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John Kolovos, CMT, CFA

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Tyler Wood, CMT

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David Lundgren, CMT, CFA

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