Episode 27: Mark Deriet, CMT, CFA

This month we discuss the rangebound markets and rotational landscape through the lens of technical tools, quantitative screens and multiple timeframes with Institutional Equity Research Analyst, Mark Deriet CMT, CMT.

"Paper > Rocks," stoicism and many many charts await listeners of this March episode of Fill the Gap! Be sure to download the chart-pack from the show notes here: https://cmtassociation.org/podcast/fill-the-gap-episode-twenty-seven-with-mark-deriet-cmt-cfa/

Mark Deriet, CMT, CFA, MA Economics | Analyst, Institutional Equity Research | Quantitative & Technical Analysis | Cormark Securities Inc.

Mark Deriet is the Quantitative and Technical Analyst for Cormark Securities Inc (previously Sprott Securities)., a leading Canadian independent investment dealer.  Mark is the recipient of the Brendan Wood TopGun award for Technical Analysis for more than 15 consecutive years.  

Mark served over 10 years on the buyside combining both fundamental and quant/technical analysis into his investment process.  In this role Mark was able to interface with many technical research analysts incorporating tools and concepts into his top-down approach.

Having earned both the CFA and CMT designations, Mark appreciates the pros and cons of both disciplines. Investing primarily in Europe and emerging markets, Mark developed screening tools to isolate leaders and laggards across the vast array of securities within his mandate.  

Over the past 17 years, Mark has served in a sell-side role at Cormark. Representing their first foray into the technical and quantitative research arena. While in his current role at Cormark, Mark developed research products including top-down macro indicators to identify opportunities in sectors, industry groups and among various factors as well as bottom-up stock screens.  

When not chasing fresh powder in Whistler, Mark’s next endeavor is to launch a fund based on his proprietary quantitative momentum models later this year.  

Education: B.Comm, University of Toronto, 1993; M.A. Economics, University of Ottawa, 1995; Chartered Financial Analyst, Association for Investment Management and Research, 1998; Chartered Market Technician, CMT, 2004.

Experience: In the investment business since 1996; with Sprott Securities, now Cormark since 2006. Previously with Scotia Cassels Investment Counsel since 1999.

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

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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, Fill 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 market analysis. 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 at optima.com. Good morning, David Lundgren!\And welcome to episode 27 of Fill the Gap with our special guest this month, Mark Deriet. How are you doing today, my friend?

David Lundgren, CMT, CFA: 1:52

I'm doing excellent Tyler. You know, it's—just when you think things are getting better, we have another banking crisis to deal with. So that's always another example of where I'm thankful that I'm a technician. Because you know, as most technicians know, banks have been in underperform since 2006. I'll say that again since 2006. So in many ways, it seems like there's a lot of new things happening—banking this and banking that, but the reality is, it's that's sort of an old story, technicals have guided you away from that sector for over 15 years. Right. So yeah, I mean, it's—it, you know, Mark had a lot of lot of really interesting insights to share around what's going on here today. So I'm really, really excited to share this episode with with our listeners.

Tyler Wood, CMT: 2:33

Absolutely. It's March Madness. Everybody's brackets been broken. Everybody who was holding financials to win it all, you know, it's yeah, this is what the market does. Mark started off the interview saying that he's been humbled by the markets. And I think you pointed out, that's the job of the market. So. So Dave, for our listeners, I think first and

David Lundgren, CMT, CFA: 2:50

Yeah. Exactly. foremost, we need to point out that this episode is slightly different from other interviews that we've had in the sense that we went through Mark's process and we referred to a lot of charts throughout the interview. So for everyone who's listening to this, pause your player, head over to CMTAssociation.org/podcasts, and go to the show notes for Episode 27, with Mark Deriet, where you will find the complete chart pack. And you can follow along through this interview, referring to the charts that we're discussing throughout the episode. And Dave, what really stuck out to you in terms of some of the takeaways that Mark shared with us from his process and tools, but also what we're seeing in the current market environment? Well, I mean, for me, the I, it's another example of where we're able to bring another guest onto the podcast, who has a CMT charter who respects technicals, of course, but he's doing his best to blend the strengths of the different styles of investing. So it's fundamental, quant, technical. And Mark happens to be pretty stellar at blending these three together. And so, the whole, again, essence of this podcast is "fill the gap". And it's whole point is to bring these things together to help each of them lever each other's strengths, but also protect each other against their weaknesses. And so technicals plays a big role on the risk management side and the stock selection and asset selection part of it. And so, you know, Mark has been doing this for a long time. I've known Mark for 15 years and he's truly one of the best. He had takes a very broad view and in his research process. He's from Canada. So he does have a baseline—his benchmark, he does have a sort of hard asset bent to his perspective, and whatnot. Unfortunately, they don't have a big healthcare and technology sector, but nonetheless, his, you know, his research is very broad reaching in the sense that it's across asset classes, commodities, interest rates, effects, all of that comes into his models. And so I thought that was really, really great to shed some light on that and then we had a really important discussion, which I think is really pertinent to today's volatility is "are we in a secular bull market still? Or is this? Have we done enough damage to flip the script and enter into the next secular bear market?" Because that's what drove us into the last one, you know, with, you know, global financial crisis. So, you know, it's a lot of really pertinent topics to discuss today, especially relevant given what's happening in the environment today.

Tyler Wood, CMT: 5:30

Absolutely. I think Mark pointed out just how important timeframe is so when we're looking at very long term, indicators of trend, still finding some support. And when we look at shorter term, information and statistics, there's a lot of compression, a lot of pressure. And for our audience who's looking for that binary, we're either in a bull or a bear, hate to disappoint. But maybe therein lies the signal that we could be in a cyclical bear market within what may still be intact as a secular bull market, which in and of itself, is the signal for changing position sizing and how we how we operate in these range bound markets. Dave, with that, I invite all of our listeners to grab that chart, pack it from the show notes, and enjoy this Episode 27 with Mark Deriet, CMT, CFA.

David Lundgren, CMT, CFA: 6:25

My name is Brett Villaume, and I'm the president of the CMT Association. I would like to personally invite you to attend the CMT's 50th anniversary symposium this April 26th, 27th, and 28th in New York City. Each year, we bring together the top minds in the field of technical market analysis to present their methodologies, current outlooks on financial markets and lessons learned. Asset managers, traders, advisors, and analysts have the opportunity to meet and discuss ideas at what many have called the most open and engaging financial conference of their careers. This year's symposium aims to be our best yet, as we celebrate our 50th year of being the global standard in technical analysis research and education. Enjoy cocktails and conversation at the fabled New York Stock Exchange. Meet the Living Legends of technical analysis such as Ralph Acampora, Ned Davis, Tom DeMarco, and many more. If you're interested in leveraging this world class event to get your company's thought leadership and brand identity center stage, customizable corporate sponsorship opportunities are still available. Visit our website at CMTassociation.org to register now. Welcome to Episode 27 of Fill the Gap the official podcast of the CMT Association. This month Tyler and I welcome Mark Deriet to the podcast. Mark is of course a CMT charter holder but he's also a CFA charter holder as well. Mark is the chief technician and head of quant research at Cormark Securities in Toronto. Since 2008, Mark has ranked number one in both technical and quant strategy categories in the Brendan Wood institutional investor survey in Canada. I've known Mark for over 15 years, and I've been following his work very closely and I have benefited greatly for having done so. Mark Deriet, welcome to Fill the Gap.

Mark Deriet, CMT, CFA: 8:20

Thanks so much Dave. And Tyler, it's quite an honor. Let me tell you. You've had some amazing guests here. And I'm pleasantly surprised and a little bit shocked that I'm one of them.

David Lundgren, CMT, CFA: 8:31

As always, as always, one of the things I've loved about you is that you're you're always so humble and modest. But I did just say that you've been ranked number one since 2008. So right back at you, kid.

Mark Deriet, CMT, CFA: 8:42

Well, the market has humbled me today.

David Lundgren, CMT, CFA: 8:45

And always does. That's its job. So usually, before we get into your process, and what you're thinking about the world today and markets and maybe some thoughts on what's happening more recently, we want to give our listeners an opportunity to learn a little bit more about you. So maybe you can tell us about a bit about your background, how you get into the investment business, but more than anything, perhaps what was it about technical analysis that drew you to this field versus fundamental?

Mark Deriet, CMT, CFA: 9:11

Yeah, sure. So my academic background, I've got a B Com, business degree from U of T and then a master's in economics. And, frankly, when I graduated, it was 1994. Canada was undergoing quite a vicious recession. And there weren't a lot of positions. But I kind of lucked into a role at the—just through the U of T job board. I didn't know anything about the stock market, economics is, as you know, it's quite a theoretical subject matter a lot of people go work for the Bank of Canada or the federal government and so on. So kind of luck my way into the business, frankly. I think it takes perseverance and luck for all of us. So on the buy side—I started on the buy side for about 10 years and, another sort of stroke of luck, one of the first Sell side analysts I met was a man named Dennis Mark and he was a technical analyst at Merrill Lynch, Canada at the time, he's still working. He's at national bank now. And I'm happy to say we're really good friend, he likes to be up on the tennis court, as well as the charts, but he kind of took me under my wing, and I followed his work, you know, along with fundamental work as well, as you make sure to have the CFA so I was kind of combining the two. But you know, he tended to be more right than wrong. So that's what what kind of got me hooked on charts, frankly. So, you know, I first did the CFA, and then a couple years later did the CMT, but I've always kind of had an eye on the technicals thanks to Dennis.

David Lundgren, CMT, CFA: 10:45

Yeah. And have you have you ever been a fundamental analyst? Or has it always been some mixture of it with a heavy dose of technicals?

Mark Deriet, CMT, CFA: 10:51

Yeah, absolutely. I was fundamental analyst. Most of my buy side career was at Scotiabank, where Right, so like earnings, revisions and earnings estimates I was working on the international team with the job, Amir, he had a bit of a value bent. So that was interesting to kind of overlay technicals. But he was amenable to it. And I was beats and things like that. working, mostly investing in Europe and emerging markets. So Exactly. profitability, trends and profitability. But I would, as you can imagine, you can't really go and kick the tires of a Taiwan semi or bank in Brazil or whatever. We did meet with a lot of management teams from Europe, but not a lot of EN companies would come to Toronto. So I needed some sort of a screen—some sort of a technique to identify ideas. You know, it's a big world out there and you can't read about every company from the <unknown> perspective. So I also got into quants that way too. So not only screening on price momentum techniques, but also put a fundamental momentum. you know, at Scotia, I started off as an analyst, literally writing up kind of one or two pagers on company XYZ, giving my buy/seller whole recommendations. I definitely did a lot of fundamental work.

David Lundgren, CMT, CFA: 12:15

Yeah. So it was that's kind of what I was getting at the fundamental work you've done has actually been at the security level, not necessarily just fundamental macro, which is what I really think of when I think about Mark Deriet, I think of you of being one of the best at combining sort of top down macro, fundamental data points, along with the bottom up technical—and top down technicals as well—mashing those two together. But if I understand you correctly, you're at the beginning of your career, you were actually a fundamental security, individual security analyst.

Mark Deriet, CMT, CFA: 12:42

Exactly. You know, talking about migration. Talking about what the company does, you know their motives or whatever.

David Lundgren, CMT, CFA: 12:48

Yeah. Right, right. Let's maybe talk a little bit more about your process as it stands today, because I know you as I said, you combine both fundamental and technical, but it's it's more macro fundamental, more so than individual security fundamentals, but you have a very, very heavy weighting towards the quantitative, I might call a systematic, but you actually might better refer to it as quantitative, given the level of back testing and everything that you're doing there. So maybe you can talk a little bit about how you meshed best, the two together and why you mesh the two together?

Mark Deriet, CMT, CFA: 13:21

Yeah. So I guess I kind of talk about three buckets, right. So there's traditional technical analysis, looking at the charts or building momentum models. That's one bucket. And that kind of lends itself to macro as well, because you're looking at currencies and commodities, and bonds, and so on. So sector rotation factors. So that's easily leads into the macro, if you will. And then I do quantitative models, strictly in Canada. Now for the sell side, I used to do it in the US and so on as well. But so that looks at as I said, more fundamental factors, as you mentioned, surprise revision, simple things like ROV, and the trends are really valuation techniques as well. And then I also kind of blend in these top down factors more for confirmation. And also, frankly, to kind of tell a story that sort of tie it all together. I think the buy side really appreciates that. If, let's say everyone's worried about a recession now, so do I have any sort of indicators to show: are we heading into recession or not? So talk about that, and you know, what sort of sectors could do well in that environment. So you're kind of marrying those top down factors with the bottom up and seeing if they all fit together, if you will. There's—

David Lundgren, CMT, CFA: 14:50

Kind of like a confluence.

Mark Deriet, CMT, CFA: 14:51

Yeah, exactly. There's some sort of obvious divergence.

Tyler Wood, CMT: 14:55

Mark, you mentioned that the trend of return on equity how many quarters back are you looking when you're trying to understand the trend of some of those fundamental factors?

Mark Deriet, CMT, CFA: 15:03

Yeah, I look at a longer term view and a near term view. So things like, y'know, up to 10 years of history, are you profitable company to begin with? If so, usually stock does better. And then I look at a trailing 12 month ROE, and I look at that on a quarter over quarter basis, and then a year over year basis. That's how I kind of try to catch those turns, if you will.

David Lundgren, CMT, CFA: 15:32

And what got you to return on equity, because there are a lot of different ways that you can measure the profitability of a company. And there's obviously pros and cons to every one of them. And there were a lot of there were a lot of issues with return on equity. So how did you get to return on equity as being the the factor that you wanted to isolate for profitability?

Mark Deriet, CMT, CFA: 15:52

Yeah, that's a good question. So, you know, you can look at return on invested capital or earnings per share EBITDA so on, you know, when I first started, no one was talking about EBITDA now that seems to be the soup du jour but I think it was Charlie Munger said EBITDA is BS for earnings. Doesn't make any sense to him anyway, yeah, he's a pretty smart guy, I think I trust him. But then from a practical standpoint, I'm comparing, you know, banks in Canada to tech stocks to energy stocks, and so on. And banks don't report EBITDA, banks report return on invested capital. So it's a clean number. And it's a simple number. And there are issues with earnings as well. But if you're looking at, you know, the trends over time that delta is a big driver. And that tends to be the most effective factor, even for, you know, energy companies or mining companies, by the way. I was just in Calgary last week, and I, I sometimes I present to CEOs of actual companies to tell them what works and kind of what the view of the world is. And the first time I did this was just before oil cracked in 2008, or whatever. And I said, you know, I look at earnings quanties will look at earnings, they looked at me, like I had two heads, they've never made a dime. For a long time. old adage, it's, you know, put $2 in the ground and get $1 out. So. So now, they're actually very profitable companies. They're being run differently. The average ROV, for an EMP stock in Canada, at the bottom a couple of years ago was minus 10%. Now, it's plus 20%. Wow, not only because the commodity is run, but they actually really run the cost of their business. So now I can go back to them and say, Hey, by the way, earnings do matter, and you've got a you've got a bolt.

David Lundgren, CMT, CFA: 17:56

Now, when you're looking at the fundamentals, obviously, when you're thinking about return on equity, that that could arguably potentially steer you away from some pretty important sectors and industries that are just not profitable. So there's a lot of really rapid growth tech companies that are not making money yet. We're thankful we haven't own them over the past year, but there are times when you really want to own them. And, you know, obviously the one that comes front and center that has massive sort of lottery ticket type return profile, but they don't make money until the until the moment they do would be biotech. So do you find that your model ends up steering clear from that? And maybe that maybe that's a smaller issue for you? Because there's there's not a lot of tech and biotech in Canada to begin with?

Mark Deriet, CMT, CFA: 18:35

Yeah, it is. It is a bit of a nuance, you're right. And I always say a gold stocks will be like that as well. They tend to not make a lot of money. So I joke that whole thing, companies that are poking holes in the ground or poking needles in patients to try to find a cure, generally are good performance, you know, like, that aspect of them anyway. Yeah, capital profitability for them.

David Lundgren, CMT, CFA: 19:00

Yeah. You make adjustments for it?

Mark Deriet, CMT, CFA: 19:03

Yeah, you rely more on price momentum.

David Lundgren, CMT, CFA: 19:05

Yeah. Yeah, yep. Okay.

Tyler Wood, CMT: 19:07

And you mentioned the delta, Mark. Is the rate of change more important than the absolute trend itself? When you're talking about ROE?

Mark Deriet, CMT, CFA: 19:15

Yeah, over the long term, the level is a bit more important. But over the near term, you want to catch that delta. You can go from minus 10 to minus five. And that's a that's a really good thing.

David Lundgren, CMT, CFA: 19:26

Yeah, interesting. And over the years, I've followed your, your baker's dozen indicators. Is that a mashing of both quant and technical or was that just purely technical? Refresh my memory?

Mark Deriet, CMT, CFA: 19:39

Yeah, it's, you know, I've tinkered with it over the years to be honest with you, I used to have some macro data and they're like, yeah, the trend of jobless claims was one, for instance, so on and I also used to have longer term indicators as well like a monthly Copic curve. For instance, when COVID hit it was so quick my baker's dozen wasn't effective, you couldn't catch that quick slice. And then the quick rally was even more difficult to catch. I have altered it to pure technicals of 13 risk trades across financial markets. I don't have any more macro factors and so on. And they're all live. So I can track it, follow them live. So I think you just have to go with the flow. And some, you know, there's no silver bullet, obviously, you've got to adjust the market.

David Lundgren, CMT, CFA: 20:30

Yeah, not too long ago, the CMT Association had a topic at one of the symposiums called Fusion analysis, and it was all about bringing these things together. And so you know, there's absolutely value in it, particularly if you're trying to think about how to get non technical investors to see the value and how they can utilize some of these technical tools to help them better navigate the datasets they do have. But I guess at the end of the day, if we're true technicians, true trend following investors, then the core of our philosophy is that the market knows all of that. So no matter what, what we're thinking, no matter which macro factors we're looking at, the markets not only looked at that, and determine whether or not they're relevant or not, but they've also looked at 1000s of other things that we don't even know we're not looking at. So at the end of the day, that's why I've always come back to the idea that price matters most anyway. So I like you today, Mark, I do follow a lot of those macro factors, but I don't I don't put them in any of my models because the markets already doing that for me.

Mark Deriet, CMT, CFA: 21:27

I totally agree with that. For sure. I look at it, I would say again to kind of tie in the story, you know, right? No sense of it. And for confirmation, I suppose. So I'll show you a slide and the deck that I have that combines some simple risk indicators with some macro indicators.

David Lundgren, CMT, CFA: 21:48

Rest assured that we will have these these slides available in the show notes so before you listen fully to the podcast, I'd open the show notes and follow along that way.

Mark Deriet, CMT, CFA: 21:57

Yeah. So on slide 37. In blue are five risk trades simple things like copper to gold, the CRB raw industrials which is different than the normal CRB it has things that are used in the real economy like scrap steel and rubber and tallow, which I had to learn is used for candles and so on. And then corporate spreads, EM currencies and global cyclical sectors versus defense. So the momentum of all five of those is the blue line. And the red line is a basket of global leading economic indicators, including the OECD, US PMI, Chinese PMI, the Karaman IFO business expectations, and Korean and Taiwanese exports. They're very opening cognates. So you can see those red and blue lines tend to trend together. They peaked in, kind of, mid '21. And the blue line bottom two months ago, the risk trades and the red line at its first significant uptick this month. So if you look at the individual factors, you know, Europe, for instance, got really, really bad the German IFO got to minus 40, zero and B, that delineation sort of like the PMI, it almost got to the same levels as COVID. And the great financial crisis occurred worse. And now it's you know, it's zooming up to minus 10 still contracting, but it's the delta that matters. So you know, that the economy's kind of aren't really in sync right now. Because I'm locked down, the Chinese PMI just came out and expensive territory. So you know, the point is, I can tell a story about why these risk trades are acting the way they are, because they're following the broad macro trends.

David Lundgren, CMT, CFA: 23:53

And just to be clear on this chart, I mean, it's incredible to me how how closely they align with one another, particularly at the turning points, you oftentimes don't see that. So is there any lead lag on this chart? Or are they right on top of each other?

Mark Deriet, CMT, CFA: 24:05

They're right on top. Yeah, interesting. Okay. So I kind of think about this as risk reward too, right? Like if if that red line and the blue line for that matter, stretch too far up or down. It's like that rubber band effect, right? So that leading indicator got to two deviations below the mean. Also, the third worse, excluding COVID, UFC. So you know, at that point, you're recognizing that things are pretty bad around the world, and maybe it's time to go the other way.

David Lundgren, CMT, CFA: 24:36

Right. Before we get too deep into the specific indicators. Anything else you want to talk about with just with respect to your philosophy of, of technical or trend following? Before we dive into more your process at a high level, anything we're missing?

Mark Deriet, CMT, CFA: 24:51

Um, I think I was lucky to start off on the buy side because I got to speak with and meet a lot of technicians. That's sort of strange, like technicians are very quick to share their knowledge. I think a bit of—we're unique birds that way, right. We're not hiding everything. So I learned a lot from a lot of different technicians around the world. Canada has had a lot of great technician well over the years. Unfortunately, a man named Dion tui just passed away a few months ago, and he was still just up for fun for himself putting out charts in his 90s. I love that. Yeah, Ray had. He was working on Bay Street in the 70s. This guy.

David Lundgren, CMT, CFA: 25:33

For those who don't know Bay Street is the equivalent of Wall Street here in New York. Right, yeah, right. There you go. Thank you.

Mark Deriet, CMT, CFA: 25:41

There was another guy—Ray Hanson at RBC.

David Lundgren, CMT, CFA: 25:44

I remember Ray. Yeah, he was fantastic. Yeah.

Mark Deriet, CMT, CFA: 25:48

Ian Notley actually worked with Ray Hanson and I—we were applying to this on the buy side. So I really appreciate the fact that the work you guys are doing at the CMT in this podcast, as well as kind of spreading the news, right, and it's not insular. It's people are very happy to share their process.

Tyler Wood, CMT: 26:08

But one thingyou said Mark that that really struck me is that models change over time. John Kolovos, who's one of our board members, says, "Every day is a new back test!' And so the snap lower and the snap back during COVID probably change some of the ways that you use inputs. So you mentioned that technicians are very likely to share whatever it is that they're working on to try to advance the discipline and find new areas for exploration, as opposed to sheltering proprietary information. Because you you got to directly from the corporation, it's a very different mindset for sure.

Mark Deriet, CMT, CFA: 26:42

So I've really benefited from that over

David Lundgren, CMT, CFA: 26:44

And so, so Mark, let's, let's maybe, the years. let's maybe dive in a little bit to a conversation that pulls together, both your process and what your process is saying about the current market environment. So a few questions on like, what's happening, what your view is of the market, but then just kind of color it in with your with the the aspects of your process to get you to your current view. So I know you think a lot about like whether or not we're in a cyclical bull, secular bull, cyclical bear, et cetera, et cetera. How would you characterize the equity market today? What where are we in the cycle?

Mark Deriet, CMT, CFA: 27:23

Yeah, so equities I think we're in a long term bull. You know, frankly, I, it looks to me like restarting another cyclical bull run here. In October, we had the classic retest with fewer new lows participating on the downside than new highs starting to expand, get a breath thrust in November, it was a little bit different than the August breath dress because the longer term indicators were starting to expand. You had the dollar start to fall you had EM currencies rallying, you had credit spreads starting to tight. You had global equities breaking above their August highs led by Europe, cyclicals leading. And then last week, you know, just to get the near term, we had three big down days in a row. Obviously, we know what what kicked that off.

Tyler Wood, CMT: 28:17

We're recording here on March 15. And referring to of course, Silicon Valley Bank and Signature Bank's debacles last week.

Mark Deriet, CMT, CFA: 28:25

Yeah. So when that happens, you just have as a technician, you got to stand up and say, oh, we'll be more focused on risk management then. And then some of our shorter term indicators gave sell signals. So you know, I wanted to talk about rates as well. So you had Tyler a slide on rate. So maybe we can run through some of those charts, because that's, you know, very, very important here and what's going on with the Fed. And so.

David Lundgren, CMT, CFA: 28:50

Yeah, I think I think the rates is a definitely a question we have to get to, because that that could be arguably be the you talk about the importance of rate of inflections and rate of change, this could be the most important trend inflection we could talk about. But before we do, I just want to just go back to your earlier comment about the equity market. So just to paraphrase, just to make sure I understood you correctly. The bigger picture view is we're in a secular bull. I'm assuming you have that pegged at 2009 as well? At the GFC bottom?

Mark Deriet, CMT, CFA: 29:16

Yeah either that or the 2013 breakout,

David Lundgren, CMT, CFA: 29:19

Depending on how you want to measure it, right?

Mark Deriet, CMT, CFA: 29:20

Do you take the '74 low or the '80 breakout?

David Lundgren, CMT, CFA: 29:23

Yeah. Okay, so, so if we have that as our base case, we can see why that would be and then you've got a series of higher lows along the way. The correction that we're, you know, the cyclical bear market that we're in or having completed recently make well, you know, the jury's out was 2022, you're currently viewing that as just a cyclical bear market did not derail the secular bull. You began to see evidence of the resumption of a cyclical bull based on those things you just delineated and I'd be curious to know, since then, since basically early February, there's been a lot of damage being done in there's been a lot of volatility. There's been A lot of potential inflections, which which are super important in your work. Has there been anything that you've seen in your work to suggest that that the the nascent indications of a new cyclical bull market, you gotta throw that thesis out the window? Or is it still vibrant?

Mark Deriet, CMT, CFA: 30:14

I think the key is rates that might might damage and Outlook right, the two year bond yield cracking and Yeah, huge volatility and rates, like the move index says, you know, other than a weight is the highest it's ever been, I think that is, you know, putting a bit of a damper on on the outlook for sure.

David Lundgren, CMT, CFA: 30:35

Right.

Mark Deriet, CMT, CFA: 30:36

We can speak to the like why I think it's still a secular bull and what the triggers are if we want to look at the slides. So.

David Lundgren, CMT, CFA: 30:45

Yeah, please.

Mark Deriet, CMT, CFA: 30:46

Like 10 would be a simple one. So this is just the S&P going back to the 1930s or so. And so there's two moving averages here. This is a monthly chart, the green is a 40 month, and the red is an 80 month moving average. It's a little esoteric, why 80 months, I look at primarily a 20 week moving average, an 80 week, and then either a 40 or 80 month moving average. And if you think about a Bollinger band, you know that 20 period is in the middle range, so a week gets you 100 days, the monthly is around 80 weeks, and so on. So the point of this though, the red line is 80 months, and I've circled where the prior secular bulls when they crossed below that red line. And until then, until proven otherwise, that's a secular bull. So the one from the '80 to 2000 period, never broke the green line, the 40 month even during the '87 crash, and then the prior bull either held the green or the red line, but didn't break it until 1970. So unfortunately, that red line is a little bit further down now, it's a 3250, roughly, the green line, we're kind of flirting with it today, it's around 3850. So that to me, you know, if you just zoom out, I felt like I've taught my kids who are now 15 and 12. How to read charts and it's a that's still in an uptrend, right, higher highs, higher lows.

David Lundgren, CMT, CFA: 32:24

Do you see any similarity between say the 40s to the 70s in '09 to now that might that might warrant expectations that you could in this secular bull market that you could get down to the red line and still be in a bull market? I'm thinking right off the top of my head, of course, is the inflationary environment has changed, right. So we've gone from disinflation in the 20s and 30s to reflation into inflation, up until the late 60s, and arguably, we're doing the same now. So could just be like a bumpier bull market because of that, because there's just inflation to contend with.

Mark Deriet, CMT, CFA: 32:57

Potentially on, like, the next slide actually doesn't address that directly. But this is the Dow adjusted for inflation. So look at the difference now versus the 70s. In the middle left part of that chart, right. I'm saying it's not that 70 show, you know, the Dow went basically sideways, but the real Dow adjusted for inflation was straight down. And now it's not straight down, still arguably it the uptrend.

David Lundgren, CMT, CFA: 33:27

Right.

Mark Deriet, CMT, CFA: 33:28

So and then there's another version. On slide 16. So this is what I call paper over rocks. It's just the Dow divided by gold. So there's you know, Canada's chock full of resource stocks, as you likely know. So there's a debate whether we're in a supercycle for commodities. Well, I don't think we are. This is the Dow to gold ratio. So those black arrows are when commodities have their supercycle, obviously, they do better than the Dow so that that ratio falls. And then the shaded trendline is your bull from 1980 to 2000. So if we were to take out to the downside, the COVID low, which is that dip on the chart on the right, then you could probably question that secular bull. But until then, I think it's paper over rocks. And then the next couple of slides talk about commodities here but this is the Bloomberg commodity index. So if it's a supercycle like the lower left upper right type of chart we saw from during the 2000 then it should not have failed roughly around the 38% retracement level of that whole drawdown at a peak. So if that would have been taken out to the upside I really would be scratching my head about it supercycle And then the next slide shows currencies and being reported here. So the Canadian dollar, this too, oddly enough failed right up a 38% retracement level of off the peak. That's around 83 cents. So again, if it's a supercycle for commodities, Canadian dollar doesn't believe it.

David Lundgren, CMT, CFA: 35:22

Now, I mean, when when you're looking at any index, of course, you'll always have to remember what to ask yourself. What's in the index, and you know, is what you're seeing at the index level, mirroring what you see beneath the surface. And I think most people would agree that when you when you dig into the commodity, space, there's not much to like there, broadly speaking. So like, I remember investing through the last commodity cycle and from '03-'04 up until '07-'08. And, you know, you could throw a dart and then hit in every, every dart would hit a trending upwardly trending commodity. And today, it's the opposite. So I mean, at the minimum, it would seem like even though the index isn't quite confirming that we're not in a, you know, a secular bull yet, for commodities, just to give beneath the surface, I mean, it's pretty hard to—I mean, look at the price of heating oil. I mean, that's—if that's not a top, I don't know what it is. And natural gas and the industrial metals, platinum, palladium, you know, the best one is probably gold, and it's kind of sideways, and I guess maybe there's some sauce, obviously, eggs are on fire. But we know that that's a fundamental reason, but—

Tyler Wood, CMT: 36:25

I think<unknown> pointed out that eggs cracked yesterday, Dave.

David Lundgren, CMT, CFA: 36:29

They did, they did. Yeah, right.

Mark Deriet, CMT, CFA: 36:34

So silver is another chart, by the way, you know, kind of a crazy cousin to gold, and it's very, very high data. Silver also happened to fail right around that 38% retracement level, I don't have the chart to show you. But that's around $28 to $30. So if silver were to break out, and if you know if that happened, gold would probably get above 2000, so. So you know, these are kind of the big picture charts, which keeps me involved in stocks and not rocks.

David Lundgren, CMT, CFA: 37:05

Right. And so when you when you get to that analysis, you get to that conclusion based on looking at these related markets, then you try to translate that, and you try to take action on that perspective in the equity market. How easy is it for you to do that? Are you finding paper oriented stocks relative to rock stocks, if you will, you know?

Mark Deriet, CMT, CFA: 37:30

Yeah, yeah, it's a good. So let's take energy right now. Because energy, as you know, was the star of the show last year and for a while, so if you got a 27—and oil is down four bucks or so today, obviously—so on 27, I look at global energy versus the world, that's on the right hand side. So obviously a big uptrend. But the momentum high was in the summer, that happened to coincide with the worst of times in the markets in terms of lows. It's just breaking the 200 day, you know, it wasn't quite clear this charts a couple of days ago that I sent you, but today it's the obvious, and then on the left, I rank the sectors in North America. So I just use the S&P and TSX combined by breadth, long term breadth. So if you're at the top of that ranking, one is the best and 12 is the worst <unknown>. So you can see, it's a bit of a misprint, October of '18. That red circle is when it really cracked. And that coincides with the red circles on the right chart. It was the worst sector for a long, long time. And then that breath really expanded in the spring of '21. And just a few days ago, when I say these charts, it weighed its lowest level in two years, basically. And now you know that that's even lower? I think it's, as of today's damage. It's down to like seven out of 12. So I think the point is, you know, tying it back maybe to the macro is that you can have cyclical goals in commodities, but their stocks to rent not own which is more typical of how they act in history. And we had these outsize moves and all these commodities, natural gas skills and other one that went from, I think a low of 400 to almost 2000. Then it came crashing down. So we had all these supply chain issues which cause these big brands and commodities. But again, they're there to rent.

Tyler Wood, CMT: 39:48

And so Mark this this chart, left side is showing us breath within the energy sector, so equities exposed to the energy sector,

David Lundgren, CMT, CFA: 39:57

And relevant relative to the other sectors.

Mark Deriet, CMT, CFA: 40:00

Yeah, if you go back, Tyler, to page 23, I rank all the sectors.

Tyler Wood, CMT: 40:05

Got it.

Mark Deriet, CMT, CFA: 40:05

In North America, you'll see that kind of ties in maybe a little hard to see. But it's sorted by that long term score and energy had fallen to, four out of twelve at the time. And I have on the far right column, a shorter term score. So I like to combine two momentum periods. And then you can put it into context. So the bottom sort of scatterplot shows the long term score on the x axis and the short term score on the Y axis. And you can see energies in the lower right. So it's it was hugging that sunshine in the upper right for quite a while. I tagline, "It's not like Icarus, their wings don't melt." So you embrace that strength, right?

Tyler Wood, CMT: 40:52

Yeah.

Mark Deriet, CMT, CFA: 40:52

And then you see your weakness in the rain cloud of the lower left utilities have been there. And then they tend to rotate clockwise around that schematic. So energy was in that weakening camp. Now, as of today, we'll be moving towards that rain cloud, obviously.

Tyler Wood, CMT: 41:10

Gotcha.

Mark Deriet, CMT, CFA: 41:11

So that is how I rank sectors.

Tyler Wood, CMT: 41:14

And you said two different momentum periods. But in the prior chart, we're looking at relative breadth of the sector, correct?

Mark Deriet, CMT, CFA: 41:19

Just to be specific, we're looking at

Tyler Wood, CMT: 41:20

I see. the x axis of energy over time, which, if you if you go through that slide, you'll see energy starting in April, what's 1111, then it's two, etc. So that blue line corresponds with that 123 or four.

Mark Deriet, CMT, CFA: 41:40

So it would have been at the at 12 at the bottom of those rankings from '18 early '21.

Tyler Wood, CMT: 41:48

Gotcha.

David Lundgren, CMT, CFA: 41:48

Into your point. In terms of paper over rocks, the fact that tech discretionary industrials are in the top right side of this quadrant suggests strong long term in intermediate term or short term momentum. So that's—that will be the paper aspect of the trade?

Mark Deriet, CMT, CFA: 42:04

Yeah, exactly. And, you know, tech is an interesting one, because, you know, those are the long duration stocks, right. So maybe this leads back to the rate fall. So now we are seeing technology is moving up the list. So the second column from the right shows the delta over the last three months. So that score now versus three months ago, Tech has moved up, and gold doesn't show here. But as of very recently, it started to move up as well. So those things that compete with rates are moving up, as the bond market is rallying.

David Lundgren, CMT, CFA: 42:45

And what is your UCC? A lot of folks saying that, that without the financial sector in particular without the banks participating, you kind of like on a wing and a prayer for if you're expecting a bull market without financial, so what do you say to that? I mean, even from '09 to 2020, at least the banks were going up, they weren't outperforming but at least they were going up. So this is a big doughnut hole event again, in the banking sector with like, the possibility to Credit Suisse has its issues now trading out down below $2. I don't know if it still is or not, but it was earlier today, does that undermine a bull thesis? Or can we just can we just have a bull market without financials at least not being a doughnut hole?

Mark Deriet, CMT, CFA: 43:27

I think the way you phrase is is correct, you know, they can't be going down aggressively in a bull market. Like if you overlay the financials like the big banks, JP Morgan or whatever, and the markets you know, the odds of them diverging for a long time are very low, I would say they don't have to outperform but I think they have to participate. So last week, obviously with a carry getting whacked on massive volume. That's not a good thing. On the flip side, there are some areas that are holding up—semies in particular holding up quite well. I haven't looked at them today yet, but. Industrials, they are down today the caterpillars of the world. But you know cyclical areas aren't collapsing en masse yet. I do look at a chart combining them all global cyclicals versus defense, and that's starting to come in, but it had made new highs fairly recently. You know, it's not an en masse selling as of yet. But the defense—it is rotating into the deep end. If you look at equally weighted Utes and Staples versus the equally weighted S&P that just broke out above its 200 day for the first time. And not surprisingly, credit spreads also broke above the 200 day, either yesterday or today.

David Lundgren, CMT, CFA: 44:51

Right. Some warnings but nothing concrete nothing necessarily willing to identify as being the death knell for this potential new cyclical bull market.

Mark Deriet, CMT, CFA: 45:01

Yeah, it's—now longer term indicators, I would argue are still saying the tide has started to come in. And this is a big speed bump, if you will. I can talk about that, yeah, on page 15. So this top blue line measure—I look at 86 equity markets around the world, and some of the books are ranked on the table on the right, and how many are in a long term

uptrend? I just define that: 45:28

do they have a rising 200 Day and is the price above their 80 week moving average (an esoteric MA, roughly 20 months.) So the tide was at its best in the spring of'21. And you know, that's when SPACs were going crazy, and IPOs and so on, are starting to roll over, then the tide started to come out. But we got quite depressed, you can see on that indicator, late last year, and the tide started to rise led by Europe. Particular. From a tactical point of view, the bottom clip is how many are above that 100 day moving average. And that's, that's rolling over. So there's no silver bullets. There's no guarantee that unfortunately, like nature that the tide comes all the way back in on that blue line you can see. So after another thing during COVID, if you look, it was rising, it was rising, but it didn't get it typically goes from very bad to very good. And I've kind of just had a karate chop during COVID. So anything can happen that can turn down again. But it hasn't yet.

Tyler Wood, CMT: 46:39

Can I ask you something philosophical? Mark, when you see this kind of configuration where there isn't sustainable leadership in one given sector where we're having pretty fast rotation where maybe we're at that confluence, we're kind of trapped between long term support and short term pressure, is the recommendation then for clients to get much more concentrated to do more bottom up work? I mean, there are—in every market, there will be leaders and laggards. But if they're not all correlated to any given sector or any given theme, then is it really much more of a stock pickers market in this kind of range bound mess?

Mark Deriet, CMT, CFA: 47:19

It's a great question. And you know, Dave and his colleagues at Wellington used to say, you know, one stock at a time, right? Every stock one at a time and is it an uptrend or a downtrend? That's really practical, some great, great advice. So I sold your tagline in my Monday piece, saying, you know, we've got the speed bump. I don't know how, you know, how much contagion there'll be from regional banks, but they'll go back and sharpen your pencils, look at individual stocks, one at a time, tighten up your stops, don't disobey your stop losses, and stick with stocks that are emerging. So I totally agree.

Tyler Wood, CMT: 48:01

I mean, if if trends are created by following the herd and the herd, it's all just deer in the headlights and not not going anywhere. Then you got to change the game that we're playing, right? Louise Yamada used to teach us that, when in doubt, zoom out. We've talked about some very long term indicators that we could use for understanding the secular moves. Would you advise clients to start moving to shorter timeframes in this space?

Mark Deriet, CMT, CFA: 48:26

Well, yeah, so you know, practically speaking, a number of clients will be trading around core positions often, that's how—that's why they use technicals predominantly. I actually, I can play that game, too, I guess. But I prefer to identify leaders and stick with them until proven otherwise, I kind of say, technicians are good to be used to what to buy, not when, looking for leadership and avoiding laggards. But you know, I think you have to combine both timeframes. And unfortunately, there's mixed messages now in the market timeframe. So maybe, maybe that's a good segue to talking about rates because the secular downtrend for the 10 year has been broken. But I've got some indicators that were flashing trouble. So that's a very important takeaway from the market right now. Maybe pull up those slides. That's on page six and seven.

David Lundgren, CMT, CFA: 49:26

Front of the package so it must be

Mark Deriet, CMT, CFA: 49:28

Yeah, well, I figure rates are front important. and center, right? So you can get out your ruler and draw any trendline you want but the thick black one has finally been exceeded. That was the middle of last year. And I'm a big fan of I think it's constant ground came up with this idea of bullish or bearish regime for the RSI indicator, right, getting above 60 is embrace strength I say getting below 40 is a weakness. So this is like quarterly chart aren't for the 10 year. And that red circle at the bottom left turns negative below 40 in the mid '80s. And only in the middle of last year did it flash up Isaac <unknown> technique. So that's confirmation to me that there's a game changer. But the next slide shows some concerns. So the red line is a basket of all the 10 indicators that are listed in the table below it. One of them happens to be regional banks versus REITs, the KRE versus IYR pretty weak. But that red line peaked in June of last year, and it did not confirm the new high and the 10 year yield, which is in blue. And you can see that mysteriously that red line tends to turn both up and down not confirming the major turn to the tenure. So you know, that kind of suggested that we've seen enough upside now. So that has all sorts of implications, right. For sectors, as I said, long duration tack, and gold should do better. The shortest duration of energy, obviously, it's getting shellac. And then it has implications for value versus growth. So value is in the lead for quite a while that's breaking down relative to growth. And has implications for geographies over I am in Canada that TSX is a great place to be that's now rolling over versus the world. And then, you know, EAFE versus the S&P that broke a big trendline in favor of EAFE. Maybe it backs and Phil's here, perhaps tech give the bed. But structurally there's something going on in EAFE land.

David Lundgren, CMT, CFA: 51:56

So can you can you flesh out for our listeners what you mean by EFAE?

Mark Deriet, CMT, CFA: 51:59

Oh, yeah, Europe, Asia and the Far East EFA is a ticker that tracks it.

David Lundgren, CMT, CFA: 52:06

And you're saying that relative to the US or relative to the world? It's starting to break down?

Mark Deriet, CMT, CFA: 52:13

Yeah, if you go to [page] 14, right, start off 14. It's a weekly timeframe in the last five years. So that red line on that chart is the 80 week moving average. And then you see the weekly RSI at the top gave that confidence ground bowl about 60 signal. At the bottom, it's in positive territory. So that downtrend on that weekly timeframe, it's broken in favor of EFAE. And if you zoom out on the left, you'll see the monthly and maybe it's only the first inning of that trade, or it's not even definitive, I would say but the monthly RSI is at its highest level in about a decade. So that flex it's starting.

David Lundgren, CMT, CFA: 53:04

Okay, so just to be clear that—maybe I misunderstood you. So you're saying that it appears that capital flows are inflecting in favor of EFA over SPY so in other words international versus the US

Mark Deriet, CMT, CFA: 53:16

Yes.

David Lundgren, CMT, CFA: 53:17

And you would you would tie that development to what's happening on the long year Treasury yield breaking its multi decade downtrend.

Mark Deriet, CMT, CFA: 53:25

Yeah, exactly. Because, you know, the bigger picture is that EFAE only has about, as I said in the banner there, 9% Tech and lots of financials and industrials. And on those sectors got those long term charts as well. Making a flip around to either. But[page] 24 and [page] 25. So on the left of 24 is global industrials versus the world. EXI is the ticker and that's come out of a six year base. Now it's started to correct short term charts a big base breakout for industrials technology, you know, it's not quite the same it's sort of reaccelerating here near term, but it broke the 20 month which on the right is the blue line for the first time a while ago that 20 month moving average it's flattened out whereas before price held and it was rising. You see the momentum divergence at the bottom that that arrow and the monthly RSI got to 90 which is about as good as it gets. You know I do like embracing strength but typically things can stay at 90 on a monthly RSI forever. So tech—my point is well again, tactically things are quite odds tech is having a resurgence. The bigger picture after leading tech took 13 years to break out of a base after repairing the damage to that at all it's been leading then you could argue for 10 years, that's usually about as long as things lead in the past. Now we're looking for who's going to take the baton, maybe industrials are one candidate. On the next slide, I show financials, that's not going to happen today, probably better another candidate that you see on the left a monthly has been building this base since the great financial crisis. 13 years is what it took to build the base votes kind of spent enough time repairing the damage, the weekly on the right, that started to slip for obvious reasons. So probably not going to break up today. But those two areas would obviously benefit from higher rates. Right. So and structurally, technology will not benefit from higher rates so it's long duration stocks.

David Lundgren, CMT, CFA: 55:51

The ultimate irony would be if financials after underperforming for so long, finally start to outperform with all these bankruptcies in the banking space, right? So that's pretty much how it all tends to happen, right? We have all these bankruptcies after the bottom happens, and it builds the wall of worry. I think the point that most people miss is that the bankruptcies and these big issues and bottlenecks in the economy, those they incite the Fed in the global world, central banks, to liquefy the system. And that's all the market—that's what moves markets, not whether some bank is going bankrupt or not. It's, it's there, we know in which direction is liquidity flowing. And so you have combination of re-liquefied system, because central banks around the world are responding to all these bankruptcies compounded by the fact that you have this massive wall of worry, because you have these headline stories of all these companies going out of business, you put those two things together, and the ultimate irony would be the financials lead from here.

Mark Deriet, CMT, CFA: 56:44

That's interesting, kinda like when the crypto guy got—uh.

Tyler Wood, CMT: 56:48

Yeah. Right.

David Lundgren, CMT, CFA: 56:50

Yeah. Well, yeah, exactly. I would say like, like, for instance, the, the the bear market that we've been experiencing was the market's effort to tell us about the impending FTX, debacle and SPNY. And Sili Valley and everything else. So that's the whole point is that what as it's happening, we don't know why it's happening. But as technicians, we don't care. We just know that the market is in its infinite wisdom, the way machine that it is, is sniffing out these issues. And that the importance is to not get to married to the narrative, which is why I try not to follow macro stuff too closely. Because the market already knows about it. It's already processed it and when the market wants to bottom, it often bottoms when the headlines are the worst. So if you remember, like you have to, the bottom in 2009. I think it was 2010. Ben Bernanke was trying to get refinance on his home and he couldn't even get refinanced.

Mark Deriet, CMT, CFA: 57:40

That's right.

David Lundgren, CMT, CFA: 57:41

So I mean, how bad can it be, right? And the market just kept going higher. So to my earlier point, it was the ultimate irony would be from here that the financials end up outperforming, but I want to—I want to make sure I triangulate some of these things are saying because they're, I think I understand what you're saying, but I also want to make sure that there's not a potential disconnect that you're glossing over that you intend to highlight. So I'm back on page seven, I think this is a great indicator, I have something similar showing something similar. I probably stole it Borrowed. But it's basically— from you 10 years ago.

Mark Deriet, CMT, CFA: 58:11

Haha, borrowed, borrowed. I probably stole it from someone else. So it's fine. Yeah. So the red line has has turned down.

David Lundgren, CMT, CFA: 58:22

Right. And that's a compilation of it's

Mark Deriet, CMT, CFA: 58:22

Yes. essentially risk on versus risk off metrics that should go hand in hand with the direction of the 10 year treasury, which you can see it does very well here. The fact that it's turned lower is a warning that interest rates are headed lower as well, if that's true, doesn't that potentially put at risk the industrials trade, the energy trade, and all that stuff, and actually brings back into favor the US growth, tech, all that stuff. So. Yes, yes, I kind of, you know, I have an economics background so I'm somewhat—I'm afraid to say this, but talking about one hand and the other. Yeah, varying the timeframes, right. Like the the first chart showed you that the 10 year yield has broken out.

David Lundgren, CMT, CFA: 59:05

Right.

Mark Deriet, CMT, CFA: 59:05

Big picture perspective, but it's not going to go straight up. Right. So, you know, the near term rates, I think you're going lower, and maybe on page eight is another signal for that.

Tyler Wood, CMT: 59:20

Guys let's not overlook the fact that markets can move in three different directions right. Up, down or sideways. Right?

Mark Deriet, CMT, CFA: 59:26

Yeah.

Tyler Wood, CMT: 59:27

So—

David Lundgren, CMT, CFA: 59:27

Torture.

Tyler Wood, CMT: 59:29

Torture. Exactly.

David Lundgren, CMT, CFA: 59:31

John Kolovos calls it the technical torture chamber.

Tyler Wood, CMT: 59:34

Yeah, the Purgatory of a sideways range bound. Higher than that long term downtrend, but potentially not moving anywhere. Right?

David Lundgren, CMT, CFA: 59:45

That's a good result sideways for a long time.

Mark Deriet, CMT, CFA: 59:47

And that I mean, that is frankly, what's happened so far. Right.

David Lundgren, CMT, CFA: 59:50

Okay. So page eight—

Mark Deriet, CMT, CFA: 59:51

Hasn't taken a day. Yeah. Yeah. So yes, is, you know,

David Lundgren, CMT, CFA: 59:55

This is important.

Mark Deriet, CMT, CFA: 59:57

So you mentioned getting caught up with the narrative. This is the perfect slide for that. So the two year yield is in blue, and the Fed funds is in red. And a couple of years ago, you're all that, they were saying, Well, I'm not even thinking about thinking about raising rates. And then, months later, the two year yield takes off. And guess what happens? they jack up rates the fastest in history. So now they're saying, I'm going to do whatever it takes to kill inflation. And lo and behold, the two year has fallen below the fed funds. So the market is saying, That's enough, stop. So the implication, there's a bit, there's kind of, unfortunately, two sides of the coin. If that two year yield really collapses, that is a sign of a recession, you know, think about the, the price of money is going to—cost of capital is going down, while there's less demand for capital, the economy's weak. But initially, you usually do get a nice rally in the markets when the Fed is gonna close on on hold. And so the last time was Christmas of 2018, we had a big rally in the market. So you know, a recession is usually much further down the road. And on that the next slide, speaking of macro, I have a simple recession indicator, which combines four things, one of which is the two year yield. And the other three are leading economic indicators. And employment, temporary employment, people tend to fire their attempts first before their full time employees. So that's a good lead on the labor market, that's held up quite well. But if the two year yield really collapses, that line will go through its moving average, the blue line is the 20 month moving average, and you'll get a recession down the road.

David Lundgren, CMT, CFA: 1:01:48

So that's a challenge with that, obviously, this, again, is why it's important to see these things, but we don't know what the magnitude of that recession will be. The mark—it's conceivable that the markets process that already in will, as it always seems to do is bottom before we even labeled a recession or, or at least begin to get better before the headlines get better and things like that. So I mean, this has been a really strange environment between how strongly employment is held in and in the market, just like—just looking at the market. I mean, it looks like it kind of likes what it sees. I mean, it's I feel like it's absorbing this the Sili Valley default. Rather Well, I mean, it's still hasn't taken out 3800, which, you know,[knocks] knock on wood. I mean, 3800 is a key level, we've just absorbed the second largest bankruptcy in banking history, and we're still above 3800. So the market seems to be like absorbing the current with its eye on the future. And it strikes me that it doesn't—it's not too disappointed with what it sees in the future.

Mark Deriet, CMT, CFA: 1:02:51

It has been pretty resilient for sure. There's—my favorite index to look at, if I can ask you for one more slide is on [page] 13. So this is the equally weighted global index of about 3000 stocks. So it's not you know, influenced by the Apples and Microsoft's of the world like the S&P. So importantly, this gave one of those on a brown bull signals on the weekly RSI, that green circle at the bottom right? Having rolled over ahead of the S&P in November of 2021. By the way, this tends to be great for tops too. If you look at 2018 by the way, you can see how that was basically straight down after that karate chop in February of 2018. Whereas the S&P made new highs and then caught up in q4 of '18. So the world was a disaster and then the S&P caught up. Similar thing happened not as dramatic the S&P in January too but anyway, this thing made higher highs, higher lows, it exceeded the August highs on the recent rally, and it's still above the December low. So that to me is kind of the key line in the sand if you will higher highs, higher lows until proven otherwise.

Tyler Wood, CMT: 1:04:17

And for all of our listeners, what Mark is referring to there, there are some really great books out there Connie Brown, Andrew Cardwell and others have written about using momentum indicators while a security or an index is in trend. And the idea that being overbought and returning to neutral or being oversold and returning to neutral is a trend continuation Dreamland, right that you could stay overbought over a long period when there is a very robust and durable trend. And so when you see enthusiastic selling or negative momentum on Welles Wilder's RSI there, that's where that's a leading indicator of perhaps some resistance around that neutral level. They help define sort of what means neutral, what makes an overbought or an oversold? And what makes those extremes. So a lot of great further research for our listeners to go dig into.

Mark Deriet, CMT, CFA: 1:05:09

Yeah, exactly. I actually on the previous slide, Tyler. Yeah. So on that Connie Brown idea, I thought I would actually test it. So the table on the left, I went back for the Dow and then the S&P when that started to 1896. And just simply, you know, as a buy or sell trigger when the RSI got above 60 On the left, until it fell below 40 on the right. and actually works, you know, lo and behold. So the table on the right summarizes the data. If you just bought it about 60 until it fell below 40. The average return is 21% over 20 months. And if you then sold it and waited to get back in, you obviously don't get below the average drawdown that was 1.8% over 10 months. So you miss all the months. Think about it that way. So the s&p has not given that fresh buy signal yet. But the global market has.

David Lundgren, CMT, CFA: 1:06:09

Is this the standard RSI 14 week? Yeah, interesting. Well, it makes sense. I mean, what I like about this concept and concepts like it that are sort of trend following oriented, is it really strong, robust bull markets can't happen unless the RSI goes above 60. So it's this kind of gives it its viability over the long term. So it's not surprising to see that it works. inviolable rules of trend following right, Tyler,

Tyler Wood, CMT: 1:06:33

That's—I was just gonna ask—

David Lundgren, CMT, CFA: 1:06:34

First principles.

Tyler Wood, CMT: 1:06:35

—is this part of the Inviolable rules?

David Lundgren, CMT, CFA: 1:06:37

It's not, it's not. Only because it would be repeated by other things that are in there already. But this is this is a good example.

Tyler Wood, CMT: 1:06:45

Yeah. Can't merge onto the freeway unless you're going 60 miles an hour or higher.

David Lundgren, CMT, CFA: 1:06:50

Right.

Tyler Wood, CMT: 1:06:52

You're not in a trend unless you got positive momentum.

Mark Deriet, CMT, CFA: 1:06:55

Right.

Tyler Wood, CMT: 1:06:56

Golden Nugget.

David Lundgren, CMT, CFA: 1:06:57

So we've been on for about an hour. And we're super thankful for your time. Mark. As always. I'm wondering if we can, as we're moving towards the close here, if we can talk a little bit about maybe some of the things you're working on any new ideas that you come up coming up with? I mean, I've always known you to be very innovative in how you're parsing the data and combining things and looking for intuitions and whatnot. And then maybe Tyler can finish up with some some closing questions for you.

Mark Deriet, CMT, CFA: 1:07:27

Yeah, so I just hired a guy out of Queen's University, which is in Kingston, Ontario, but he has an engineering and math degree. And he's very fluent in programming and so on. So I'm working with him on back testing various ideas. I haven't come up with a new great toaster yet, if you will, but working on some things and see if they fit.

David Lundgren, CMT, CFA: 1:07:53

My natural. First question for you. Mark is what level CMT is he now, as he must be studying his CMT by now. Right?

Mark Deriet, CMT, CFA: 1:08:00

Yeah, he just started and—

David Lundgren, CMT, CFA: 1:08:02

There we go.

Mark Deriet, CMT, CFA: 1:08:04

The first day. I gave him a copy of Bill O'Neal's book.

David Lundgren, CMT, CFA: 1:08:07

Yeah, nice.

Mark Deriet, CMT, CFA: 1:08:08

I had it in stock.

David Lundgren, CMT, CFA: 1:08:09

Yeah, good start.

Mark Deriet, CMT, CFA: 1:08:12

Yeah, so no new tricks up my sleeve yet. But, you know, you're all I'm always tinkering with indicators and trying to stray too far from the process.

David Lundgren, CMT, CFA: 1:08:23

Right. Key Point. Yeah.

Tyler Wood, CMT: 1:08:25

How much of your toolkit, Mark, has changed over the years that you've been in the industry? Obviously, the application and the expression has changed dramatically, right? Market structure, new technology, all the rest, but your core understanding of what moves markets? Does that change much at all?

Mark Deriet, CMT, CFA: 1:08:45

Not really, you know, I think I think what you try to do, and I allude to this in my deck that I sent you guys is try to take the emotion out of the process, right. And I'm using some of the same spreadsheets that I built literally in 1998. And they're like a monster, like an octopus. Now with all these links, Knock on wood, it still doesn't blow up on me. But, you know, I'm always adding different ideas and so on, but I never really go back and clean up the other ones. But you know, that idea of taking the emotion out of investing, and that's, that's sort of my mantra. If you're doing fundamental work, you know, you're really invested in the story, if you will, and if it goes against you, it's almost like a personal insult. So I rank things from 1 to 10 on a momentum basis, both long and short term, and then on a quant basis, to try to do that to try to instill some discipline. I always say if I only knew like, let's say only the tickers and if you just put the stocks into teams you got a Blue Team Red Team not even know the sector's I'd probably do better than knowing if it was energy or financials or tech. You know, just really try to get your biases out. So that's what I tried to do. And I'll tie it in just for fun to stoicism. I've read a lot over the years about stoic salon and really their their raison d'etre is that, you know, you can't control the world around you, you can only control how you respond to it. So there's no point in getting all emotional, your emotions do more damage than the actual event at times. And also, you know, another another good line is that they don't, they don't fret about the past, don't worry about the future, they can only control that present moment, I actually included a quote, which I'll read you from Viktor Frankl, it's, "between stimulus and response, there's a space. In that space, the power to choose our response." So like, you know, take a breath, you know, the markets down big, you know, you can't control that, all you can control is what's in front of you. And if you think of what technician is a great tagline, trade the chart in front of you. You can't change the past of a chart, you don't know what's going to happen in the future. All you can do is try to develop signals that work over time. They're definitely not always going to work, you're gonna make a lot of mistakes. Just don't make big mistakes. And you'll do well.

David Lundgren, CMT, CFA: 1:11:23

Yeah.

Tyler Wood, CMT: 1:11:23

That's so well said. We had a quick interview with Ralph Acampora while we were in India for the 2019 summit, and he was telling the story of his first employer saying, Ralph, you were hired to make mistakes. There are two rules. One, the mistakes have to be kind of small. And two, you can't make them a second time.

David Lundgren, CMT, CFA: 1:11:47

I think I violated that. Yeah.

Tyler Wood, CMT: 1:11:51

But the analog to stoicism is really well. Well said Mark.

Mark Deriet, CMT, CFA: 1:11:55

Never, never a dull moment.

David Lundgren, CMT, CFA: 1:11:57

Never a dull moment.

Tyler Wood, CMT: 1:11:59

Mark, this has been such a pleasure. Thank you very much for spending time with Dave and I today. We get to see you in New York for the 50th anniversary symposium next month?

Mark Deriet, CMT, CFA: 1:12:07

I am intrigued. I'm trying to work on that for sure. I'd love to be there. Yeah, I've actually never attended one before.

Tyler Wood, CMT: 1:12:14

I promise there will be no fresh powder in Whistler the last three days of April, you won't be missing anything.

Mark Deriet, CMT, CFA: 1:12:21

Well, if I'm there, I'll definitely buy you guys a drink.

David Lundgren, CMT, CFA: 1:12:24

Awesome. So now you have to show up.

Tyler Wood, CMT: 1:12:29

As always, Mark, thank you very much and looking forward to talking with you again really soon.

Mark Deriet, CMT, CFA: 1:12:35

Great. Thanks a lot for your time guys.

David Lundgren, CMT, CFA: 1:12:36

Thanks so much, Mike. Great to see you. Fill the Gap is brought to you with support from Optima. In addition to candidates study of the official CMT curriculum. Optima 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 at optima.com