Taking Note Of Market Patterns

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David Keller talks investor psychology and taking note of market patterns with technical analysis (1:00). Markets arguably pricing in goldilocks scenario based on YTD returns (12:05). Bullishness on financials and infrastructure (14:30). Earnings season takeaways – beware of lowered expectations (19:10). Bitcoin break out and crypto’s excessive volatility (21:55). Recorded on November 12 and excerpted here.

Transcript

Rena Sherbill: Dave Keller, welcome to Seeking Alpha. Thanks for joining us.

Dave Keller: I appreciate it, Rena. Yeah, I’m looking forward to our conversation here.

RS: Share with our investors who may know you from your YouTube channel, who may know you from The Mindful Investor, kind of synthesize for listeners where you talk about investing, where you talk about the markets, where they can find out more of your analysis?

DK: Sounds good. So my goal is to help investors make better decisions two ways. Number one, by sort of figuring out what’s happening between your ears and getting out of your own way, making better decisions by removing some of those behavioral biases that tend to get in the way of that.

And then to improve your, what I’d call situational awareness, improve your understanding of what’s happening around you as an investor. And for me, that implies and involves using technical analysis tools, looking at charts to better understand momentum and asset flows and investor psychology.

So I try to promote that a couple of different ways. My website is Market Misbehavior. So that’s a good place to sort of get a sense of where I’m at. My YouTube channel has the same name, Market Misbehavior, and then I’m on X, my handle’s @DKellerCMT.

But my goal with doing my show on my YouTube channel, by interviewing investors, by sort of sharing ideas through my newsletter, is basically to just reinforce the fact that you do have the tools available to you to make better decisions if we can do those two things, get out of our own way and better understand the world around us. And I find a lot of investors are sort of underweight those two things. And if I can help improve that, I’m all for it.

RS: Well, because it sounds simple, but it’s not simple being mindful. It’s not simple doing those two things, right? Just sounds that way.

DK: I mean, it should be, right? And the problem is we’re fighting centuries, if not millennia of evolution. We’re fighting how our brains are wired for very good reasons. The same things, the reason why your brain is wired a certain way is to avoid being eaten by a tiger and be able to find food and be safe and find others and all of that.

But unfortunately, a lot of those same sort of primal instincts often point us in the wrong direction. And a lot of that comes down to emotions, right? We are emotional beings. That is what really separates humans from other animals is our ability to have emotions and feel emotions and act on them.

But unfortunately, that usually is not the way you want to manage your money. That’s the way you want to get in relationships to do things like that. But with your finances, you want to have more of a – of an objective sort of emotionless decision-making process, and it’s not easy. It’s a lot harder than you might think.

RS: Yes. I think we all can agree that it’s harder than we might think. Mindfulness and investing aren’t things that necessarily go together, although they, for sure, should. But I’m intrigued what brought you – are you a mindful person anyways? Does it make sense to bring it into investing? How did you get on this specific journey in your investing path?

DK: I had the very traditional entryway into the financial industry of studying music and psychology as an undergraduate at the Ohio State University. And somehow that ended up being a really good training ground for becoming a professional market strategist, and bear with me.

But with music, number one, it’s a very creative practice, right? And you have to experience emotions and portray emotions, but it’s also very mathematical. It’s very structured. It’s very much about knowing music history and understanding music theory and how things are written. And I actually focused on an area of music called orchestral conducting.

So basically, leading an orchestra of musicians. And what’s so funny is when you’re doing that, you have a hundred musicians in front of you, you’re trying to get them to all communicate some idea together. And then you glance down at an orchestral score and at a glance, you’re looking for patterns, right?

You have to look for which parts are performing together and which ones are going against each other, which ones are – what you have to anticipate what’s coming next based on your knowledge of music theory and music history.

And so the first time I saw a chart and was analyzing price action using technical indicators, it felt like I’d somehow been doing that for years because it was a similar sort of toolkit that I was very familiar with. And then the psychology part of it makes a great sense. And I think that’s where the mindfulness sort of comes in.

You realize how so many things that we can get into trouble with, right, bad habits, bad decisions, getting ourselves in unfortunate situations often come from the way that our brains are wired and just understanding what motivates decisions. And so when I realized that as an investor in my own experience, I was struggling with a lot of those same things that you would talk to a therapist about in a counseling situation, I realized it was very, very similar.

So when I’m dealing with my own clients, I feel like in a lot of ways, and even working with institutional investors, I feel like I was a market therapist more than anything. I was helping them understand why they were making bad decisions and then try to surround themselves with systems and processes and tools to minimize those decisions.

So I usually like portraying that as a mindful practice, having a good awareness of your own wiring and having a good awareness of what’s happening around you. I think it’s so important.

RS: Interesting. I definitely don’t come across many people that take that route to investing. But obviously, for anyone paying attention, there’s a lot of psychology involved in the markets. Hearing you describe it, it’s actually surprising that you don’t hear more about it. Although at first glance, it seems maybe not the most obvious path, but in many ways it should be. Kind of.

DK: So it’s funny, and there are two sort of within the technical analysis community in particular, where I’m very involved, there are two sort of sub-communities that I think are very prevalent and more than you think. One would be musicians, and I found a bunch of sort of closet musicians that play on the side.

And at some point, I’m sure we could have an epic band or something put together with the musician friends that I’ve developed that are also investors, right? Because I think part of that is there is a mathematical nature to music. You don’t think of it, but that’s how you’re trained when you study classical music deeply, that’s what you really get into where the mathematical relationships and structures and all of that. But it’s all about relating that to the emotional high of performing and playing.

The other subset would be pilots and student pilots. And that’s also part of my experience as well is learning to fly a Cessna. And I found a lot of former pilots or current private pilots. And the reason why that is a great parallel is because you have to make decisions in an airplane without emotions getting the better of you, right? And avoiding disasters, of surviving difficult situations as a pilot are all about using checklists and getting emotion out of the way and focusing on the evidence that the plane is providing back to you and your senses are gathering. And again, for the parallels to that and investing, I think, are very, very real.

RS: Yeah. A lot of parallels, a lot of good metaphors to be had. So how do you synthesize how you look at the markets, how you think about things? You can specify it as much as you want to this time that we’re in or keep it broad.

DK: Yeah. So generally speaking, I think of my investment process as a series of routines. And I sort of have the daily routine, what I call the morning coffee routine, a weekly process and a monthly process.

And when I’m working with investors, it’s a lot of just looking critically at your own routines. And I bet there are some bad habits that have creeped in, particularly during a bull market like we’re experiencing. Everyone’s a genius in a bull market. You can get away with a lot of bad habits, but when the market starts to turn, that’s when those bad habits can really have magnified impact on your portfolio.

So for me, it’s all about a daily routine, which is evaluating the market conditions, how they’ve incrementally changed from one day to the next. And for me, it’s looking at a series of charts, I have a market trend model, which is based on weekly data using the S&P 500, smoothing that out with moving averages and just defining the trend on different timeframes because my goal is to make sure that I’m on the right side of the trends. I’m a trend follower.

So I want to follow trends. I want to identify them. I want to follow them as long as possible, and then try to evaluate, look for signs of a change in the trend and using technical tools to try to anticipate those. It’s a weekly process, which I think is really important for me. I do that over the weekend when the markets are closed.

I sort of take a step back, take a deep breath. I do it early Sunday morning before my family’s awake. I get a cup of coffee and I review all the charts. And I think about what I learned in the week that just happened. I look forward to the week to come and focus on key levels, signals, patterns that would tell me that there’s a change in the conditions as I’ve defined them so far.

And then there’s a monthly process, which is really taking a step back, thinking more about longer-term trends. For me, it’s looking at a lot of weekly and monthly charts and really focusing on how the markets have evolved from one point to the next.

Because I find a lot of times it’s not about predicting the future. I think a lot of times, particularly when people learn I’m a technical analyst, they want to know what’s going to happen next as if I have this crystal ball and I’m just going to tell them, well, here’s what’s going to happen. And it’s really not like that. It’s more about defining the trends and following the trends.

And the biggest problems I think investors get into are when they are holding a portfolio or holding a position that was great for the previous cycle we were in, but it’s not good for the cycle that we’re going into and ignoring when the evidence has changed from bullish to bearish or bearish to bullish.

So my routines are all about evaluating market conditions and ensuring that I’m on the right side of the trends as much as possible.

RS: Do fundamentals figure into your analysis at all?

DK: For sure. For me, I would say investing has four kind of main pillars. There’s the fundamental, which is what companies do and their ability to grow earnings because of how they’re going to do so. There’s the technical, which is looking at the price performance and looking at the trends and momentum and relative performance.

There’s macroeconomic. And especially now in November 2024, between the elections, the Fed rate cut cycle, geopolitical risk because of events in the Middle East and all of the above and even more, there’s a lot of that. So understanding the macroeconomic environment and how interest rates and inflation and the dollar and all of those things can impact our portfolios.

And then the last one is behavioral, which is, as I mentioned, sort of what’s happening between your ears and recognizing where you can get into trouble by just your wiring of your human brain. And so for me, if you ignore one or two of those pillars, you’re just limiting your ability to better position yourself and better anticipate and I guess, better recognize changes that are happening.

A lot of times the markets are macro-driven. I would argue, in this case, that’s very much one of those. But also underneath the hood, there’s a lot of themes that are happening between sectors that are working like technology or financials, sectors that are not working so much like utilities and healthcare. And again, ignoring the clear evidence of the markets, I think, is a big fumble by a lot of investors.

RS: So talk to us a little bit more deeply and intricately about the trends that you’re seeing now, what would you highlight for investors?

DK: Well, I think the world going into the election season now and the world kind of coming out, obviously very different in a lot of ways. Arguably the markets have been pricing in sort of a Goldilocks scenario with the Fed rate cut cycle and an outlook for economic conditions going into next year. And you can see that just by the returns we’ve seen by the S&P (SPY) and the NASDAQ (QQQ) year-to-date.

But you’ve also seen areas of the market like gold, like cryptocurrencies that have actually been quite strong in recent months and in many cases through the course of 2024. I think coming out of the elections now that we can sort of take a deep breath and reflect on what’s happened, you’re certainly seeing areas of the market showing more strength than others.

And I would say a lot of charts that I look at have all had that gap higher last week, sort of coming out of the election is given a Trump presidency and to the degree that we saw the elections tilted in Trump’s favor. You’re certainly seeing certain areas of the market showing remarkable strength.

I would say with the averages overall looking at the S&P and the NASDAQ, by any technical definition, they’re pretty overextended, right? And the gap higher that you saw last week has really been really magnified how strong of a year it’s been, which as a contrarian, the contrarian hat that I have says, at some point you have tactical pullbacks to sort of alleviate those overextended conditions.

However, the longer-term trends remain quite strong. And that can be as simple as the S&P is making a clear pattern of higher highs and higher lows. That was Charles Dow in the early 20th century sort of laid out, this is how you define a market in an uptrend. I would say a lot of markets that I’m evaluating sort of have that very clear bullish trend.

So generally speaking, I think, coming out of elections, you want to lean into areas of the market that are showing a relative strength, meaning they’re performing better than others, especially at a time when it feels like many investors are probably sitting on significant gains, probably in growth areas of their portfolio so far in 2024.

I think this could be a time to rotate out of some of those areas that have been so strong and focusing on areas with emerging strength. And financials come to mind as one of those that have been less strong performers, but it really emerged here in recent months. I think you want to think of it as sort of a hybrid approach, or at least that’s how I think of it.

So what would cause financials to do well? I mean, I would say it’s a couple of things. Number one, it’s the interest rate environment. And given the Fed’s rate cut cycle, we just had the latest rate cut earlier in November. Expectations are further rate cuts going into the beginning of 2025.

A more normal shape yield curve that most likely helps regional banks, money center banks. And so ETFs like the (KBE), the (KRE), capital markets, the (KCE) are all breaking out to new 52-week highs in the last couple of weeks. And so I would say that’s partly because of that.

A Trump presidency implies lower regulation on financial institutions as well, and that’s certainly providing the most recent or at least part of the most recent boost in the financial sector.

From a technical perspective, I would say a lot of those ETFs that I just mentioned recently breaking out of what’s called a basing pattern. They’ve all been sort of sideways consolidating through much of 2024, but all of those ETFs now emerging and making new highs on stronger volume.

And that implies that investors are rotating to those areas of the market. And given that macroeconomic backdrop, given the potential policy decisions you could expect going into next year, it seems like a time and a point in the cycle where those types of stocks would do well.

RS: So let’s use financials as an example. You’re seeing that it’s probably going to do well. How do you break it down in terms of, are you just looking at the ETFs? Are you breaking it down into the stocks? How do you go even further?

DK: No, really good question. And I think there’s a balance for me in terms of a top-down approach, right, thinking about what areas of the market could do or should do well given a certain tailwind in the market. Given the interest rate environment, given the political events here recently, that would be part of it. It’s also part of it as a bottom-up process, right?

So often, and every week, scanning for stocks and ETFs that are just starting to break out. So one of the things that I would do is scan for stocks and ETFs making new three-month highs, scanning for those making new three-month lows.

And while those wouldn’t guarantee necessarily, all right, these are the ETFs we want to own, these are the ones we want to short or something like that, it gives me a working list of things to start to evaluate and then look a little more specifically.

I think the good news for equity-oriented investors in 2024, we have more access to different markets, more levers we can pull between equities, ETFs, index funds, options, futures. I mean, as an individual investor, you have more opportunities than ever before. And for arguably lower costs than ever before to access those.

But I think it also puts a little more pressure in terms of figuring out where you want to allocate. Let’s say you do see a theme like financials are probably in a good place. What particular ticker are you bringing up and where are you putting your assets?

So for me, it comes down to a combination of cost. So with a fund or an ETF, what sort of cost am I taking on by looking at this particular fund? And generally speaking, I think lower cost is usually a good place to be, unless there’s some particular reason why you think an active fund is differentiating itself in some meaningful way to the degree that it deserves the higher fees.

And then also it would be whether – stocks versus ETFs for me, it’s whether I feel like I have an edge in a particular company. And whether I see a particular catalyst for growth, whether I see within the (KBE), a particular bank that I think is in a better position than others.

More often than not, nowadays, I’m using ETFs, industry ETFs and sector ETFs, because I think they give you enough exposure to particular stocks, but they also diversify your exposure across different stocks as well.

And so I think there’s a balance of taking on the risk of owning individual names, but diversifying that risk across a group of stocks, which means if one of them has a problem, it’s not going to completely disrupt your portfolio.

So my scanning process will sometimes point me to individual names, if it’s more of a top-down theme or idea, I usually go with the sector and industry ETF, because I think that gives me exposure to the theme with not – without overexposing me to the risks of a particular company.

And coming through earning season, we’ve seen where individual companies obviously can have big binary outcomes based on earnings. So ETFs are a good way to sort of navigate through that kind of period with a lower risk.

RS: Have you seen anything from this earnings season, financial sector-wise that has you interested in specific stocks or from your strategy in general, anything that you’d care to share with investors? I know you mentioned some ETFs. Any specific names there to mention to look further into?

DK: When I think about what happened with earnings season, you could argue this was a really successful earnings season and that so many companies beat earnings. I would just remind everyone that those were very lowered expectation that those companies overcame. So it’s great job beating a much lower bar than it had been. And so that’s sort of the world we’re in.

Generally speaking, earnings expectations are coming down. Companies are beating those lower expectations. I’m not sure how much of a good news sort of thing that is.

I would say with earnings season in particular, given the uncertainty that I think is still there about what a Trump presidency could look like, given uncertainty about policy decisions and how they would actually be implemented, and how easily some of those changes could be put into play, I still think there’s a lot of uncertainty baked into equity prices, or there certainly should be.

So I think thinking and listening to forward-looking guidance going into next year about what expectations could be about interest rates and inflation, a strong dollar, and all those things and how they could impact companies and their outlooks, I think, is probably the most important takeaway to pay attention to.

I would say coming out of earnings season, and again, my technical discipline is probably the most important in my toolkit. And I would say I’m looking at areas that are emerging in a position of price strength, meaning you’re seeing investors accumulate shares. And also relative strength, which means those stocks or ETFs are doing better than average, you’re doing better than the benchmarks.

Two areas that come to mind off the top would be the financials that I mentioned. The other one would be more infrastructure plays. And an example of that, I would say, would be PAVE, like the Infrastructure ETF, ticker (PAVE). Another one that sort of gapped higher, came out of earnings season pretty well.

Infrastructure, as a theme, makes a lot of sense to me. And to be honest with you, regardless of who is elected, I think in the elections just recently, I think both of them will have to focus on infrastructure with the aging infrastructure in the U.S. So PAVE is a good way to sort of play that again without sort of taking risk on individual stocks.

But with those two areas of the market, in particular, I’m impressed by the price performance coming out of earnings, but also the relative strength, which shows you that they’re emerging even stronger than other areas of the market. And that’s generally speaking where I want to be.

RS: Can I ask you about crypto? Because I’m curious, we’ve obviously seen some great news from Bitcoin (BTC-USD) and the price that it’s achieved. It’s hard to know in terms of crypto because there’s not a lot of historical action to go off of.

What are your thoughts in terms of – I know you mentioned looking for things that haven’t been going up so much recently. What are your thoughts about crypto? How do you see that continue – do you see it continuing to fluctuate or continuing to go higher? What’s your thoughts on that cycle there?

DK: One thing that is a guarantee in the crypto space is excessive volatility. And I always caution people if they’re not, certainly more experienced investors that by aka older investors, if you’re familiar with stocks and ETFs, I mean, crypto is a volatile area of the market.

What’s good for how I approach things, I would argue it’s a petri dish for emotional investing. It’s with a lack of real fundamental data, besides like mining statistics and supply and that sort of thing, day-to-day, month-to-month, there’s not a lot of fundamental data you can cite for cryptos. It’s really, I would argue more about investor psychology and risk assessment, right, and risk appetite and speculation.

And so I think it’s a ripe area of the market to apply the technical toolkit. The downside, as you mentioned, there’s just a lack of history, right? So we don’t have so many cycles to refer to. But having said that, even with the relatively young history of cryptocurrencies, I think we’ve started to see some patterns emerge. And full disclosure, I should say, as I’m talking about this, I do hold Bitcoin and Ethereum in my own accounts.

When I’m looking at cryptocurrencies generally, I mean, I think the long-term thesis on cryptos is strong, just the general idea of decentralized finance and blockchain technology transformative. And I think the ripple effects and the implications of that are – will be digesting that for a long time. But does the opportunity in the crypto space really mean you want to be owning things like Bitcoin or the (GBTC) ETFs like that.

Now, I would argue you do. And I would say from a technical perspective, what’s impressive about something like Bitcoin is it’s really just emerging out of a broad basing pattern. If you look at the chart of Bitcoin, you can see we sort of pushed back just above 70,000, 70,000, 72,000. And for most of 2024, we’ve been sort of bumping up against that as a ceiling. About a number of times where Bitcoin has attempted to break higher, really get – gain a foothold above 70,000, it’s been unable to do so, it consistently has been pushed back.

But just again, sort of coming into the elections and now coming out, you’ve seen Bitcoin break out to the upside. I would say as a longer-term play, right, more of the cyclical pattern still quite strong. And I would just say the basic trends of making higher highs and higher lows, moving averages sloping higher, all of that reinforces the fact that the price action is more constructive.

I would caution investors on the short-term timeframe when something has rallied so aggressively in a short-term period of time, it becomes overbought or overextended, as we would say. And so I think looking for actionable entry points, meaning looking for a tactical pullback within a long-term uptrend has often been a good way to play markets like this that are starting to show strength but feel a little overextended, sort of leaning a little too far over their skis.

And I think that’s true of cryptos. That’s true with a lot of stocks as well that have had really strong gains. Waiting for good opportunities, sort of tactical pullbacks within a long-term uptrend has usually been a pretty good place to be.

But I would say from a technical perspective, Bitcoin could measure much higher than current levels, well above 100,000 for Bitcoin, given the structure and given the history of having basing patterns as we described and then breakouts that can persist much longer than people expect.

RS: I appreciate that. And you would put Ethereum (ETH-USD) and Bitcoin as the main cryptos to hold at this point.

DK: I mean, so the problem with the crypto space, and I think the potential and the challenge is that there are a bunch of other cryptocurrencies that are lesser knowns, altcoins as they were, and there are some that are still pretty widely followed. But I would say Bitcoin and Ethereum are differentiated in the case of Bitcoin, in the fact that it’s sort of the first to market, it’s the most well-known.

The ETFs that are coming out that I think opens up cryptocurrencies to a whole new cohort of investors are mostly based on Bitcoin, at least to start. So I think that’s the value there. Ethereum, arguably more than any, has more practical applications. So we’re seeing the evidence of where blockchain technology is going to help us as a society going forward and as an economy. I think Ethereum and Ethereum-based networks are where we’re seeing that mostly.

So I think those two, for sure, sort of stand out for those reasons. And then the bunch of others that, to be honest with you, I really don’t get into as much in my own portfolios just because of the unknown nature.

RS: Well, Dave, I really hope that you’ll come back for another conversation soon because I feel like there’s a lot to still unpack and get your take on. But I really, really appreciate this first conversation.

Anything else that you feel like is essential to have as a part of this first conversation to share with investors, how to think about the markets, how to look at the markets as we approach another year-end?

DK: No, I appreciate it so much, Rena. This is a lot of fun and thanks for the thoughtful questions and perspective of your own. No, I would say in general, when I work with investors, it’s all about routines. It’s all about your process. And I would encourage those listening to think about what you do every day, what you do every week, what you do every month to sort of understand the landscape and recognize changes.

And I would say too often, selling too late, holding onto something well past its expiration date as a valuable – as a viable investment candidate, I think, is the worst penalty you can commit as an investor.

So I would encourage people to surround yourselves with resources and routines to help recognize changes. Even if you don’t have to predict them, just recognize when the world has changed and make sure your portfolio adapts to that. I think that’s an area where most investors could stand to make some improvements.