by Scott Martindale
  President, Sabrient Systems LLC

In case you didn’t notice, the past several days have brought an exciting and promising change in character in the US stock market. Capital has been rotating out of the investor darlings – including the momentum, growth, and low-volatility factors, as well as Treasury bonds and “bond proxy” defensive sectors – and into the neglected market segments like value, small-mid caps, and cyclical sectors favored by Sabrient’s GARP (growth at a reasonable price) model, many of which have languished with low valuations despite solid forward growth expectations. And it came just in the nick of time.

In Q3 of last year, the S&P 500 was hitting new highs and the financial press was claiming that investors were ignoring the trade war, when in fact they weren’t ignoring it at all, as evidenced by narrow leadership coming primarily from the mega-cap secular Technology names and large cap defensive sectors (risk-off). In reality, such market behavior was unhealthy and doomed to failure without a broadening into higher-beta cyclical sectors and small-mid caps, which is what I was opining about at the time. Of course, you know what happened, as Q4 brought about an ugly selloff. And this year, Q3 was looking much the same – at least until this sudden shift in investor preferences.

Last month, as has become expected given its typically low-volume summer trading, August saw increased volatility – and also brought out apocalyptic commentaries similar to what we heard from the talking heads in December. In contrast to the severely overbought technical conditions in July when the S&P 500 managed to make a new high, August saw the opposite, with the major indices becoming severely oversold and either challenging or losing support at their 200-day moving averages or even testing their May lows, as investors grew increasingly concerned about a protracted trade war, intensifying protectionist rhetoric, geopolitical turmoil, Hard Brexit, slowing global economy, and US corporate earnings recession. Utilities and Real Estate led, while Energy trailed. Bonds surged and yields plunged. August was the worst month for value stocks in over 20 years.

But alas, it appears it we may have seen a blow-off top in bonds, and Treasury yields may have put in a bottom. All of a sudden, the major topic of conversation among the talking heads this week has been the dramatic rotation from risk-off market segments to risk-on, which has been a boon for Sabrient’s Baker’s Dozen portfolios, giving them the opportunity to gain a lot of ground versus the S&P 500 benchmark. The Energy sector had been a persistent laggard, but the shorts have been covering as oil prices have firmed up. Financials have caught a bid as US Treasury prices have fallen (and yields have risen). Small cap value has been greatly outperforming large cap growth. It seems investors are suddenly less worried about a 2020 recession, ostensibly due to renewed optimism about trade talks, or perhaps due to the apparent resilience of our economy to weather the storm.

The question, though, is whether this is just a temporary reversion to the mean – aka a “junk rally,” as some have postulated – or if it is the start of a healthy broadening in the market and a rotation from the larger, high-quality but high-priced stocks (which have been bid up by overly cautious sentiment, passive index investing, and algorithmic trading, in my view), into the promising earnings growers, cyclicals, and good-quality mid and small caps that would normally lead a rising market. After all, despite its strong year-to-date performance, the S&P 500 really hasn’t progressed much at all from last September’s high. But a real breakout finally may be in store if this risk-on rotation can continue.

I think the market is at a critical turning point. We may be seeing a tacit acknowledgment among investors that perhaps the economy is likely to hold up despite the trade war. And perhaps mega-caps with a lot of international exposure are no longer the best place to invest. And perhaps those mega-caps, along with the defensive sectors that have been leading the market for so long, are largely bid up and played out at this point such that the more attractive opportunities now lie in the unjustly neglected areas – many of which still trade at single-digit forward P/Es despite solid growth expectations.

September is historically a bad month for stocks. It is the only month in which the Dow Jones Industrials index has averaged negative performance over the past 100 years, showing positive returns about 40% of the time (according to Bespoke Investment Group). But this budding rotation may be setting up a more positive outcome. I was on the verge of publishing this month’s article early last week, but the market’s sudden (and important!) change in character led me to hold off for a few days to see how the action unfolded, and I have taken a new tack on my content.

In this periodic update, I provide a detailed market commentary, offer my technical analysis of the S&P 500, review Sabrient’s latest fundamentals based SectorCast rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. In summary, our sector rankings look defensive to me, while the technical picture is short-term overbought but longer-term bullish, and the sector rotation model takes to a solidly bullish posture. Read on…

by Scott Martindale
President, Sabrient Systems LLC

From the standpoint of the performance of the broad market indexes, US stocks held up okay over the past four weeks, including a good portion of a volatile June. However, all was not well for cyclicals, emerging markets (including China), and valuation-driven active selection in general, including Sabrient’s GARP (growth at reasonable price) portfolios. Top-scoring cyclical sectors in our models like Financial, Industrial, and Materials took a hit, while defensive sectors (and dividend-paying “bond proxies”) Utilities, Real Estate, Consumer Staples, and Telecom showed relative strength. According to BofA’s Savita Subramanian, “June was a setback for what might have been a record year for active managers.” The culprit? Macro worries in a dreaded news-driven trading environment, given escalating trade tensions, increasing protectionism, diverging monetary policy among central banks, and a strong dollar. But let’s not throw in the towel on active selection just yet. At the end of the day, stock prices are driven by interest rates and earnings, and both remain favorable for higher equity prices and fundamentals-based stock-picking.

Some investors transitioned from a “fear of missing out” at the beginning of the year to a worry that things are now “as good as it gets” … and that it might be all downhill from here. Many bearish commentators expound on how we are in the latter stages of the economic cycle while the bull market in stocks has become “long in the tooth.” But in spite of it all, little has changed with the fundamentally strong outlook underlying our bottom-up quant model, characterized by synchronized global economic growth (albeit a little lower than previously expected), strong US corporate earnings, modest inflation, low global real interest rates, a stable global banking system, and of course historic fiscal stimulus in the US (tax cuts and deregulation), with the US displaying relative favorability for investments. Sabrient’s fundamentals-based GARP model still suggests solid tailwinds for cyclicals, and indeed the start of this week showed some strong comebacks in several of our top picks – not surprising given their lower valuations, e.g., forward P/E and PEG (P/E to EPS growth ratio).

Looking ahead, expectations are high for a big-league 2Q18 earnings reporting season. But the impressive 20% year-over-year EPS growth rate for the S&P 500 is already baked into expectations, so investor focus will be on forward guidance and how much the trade rhetoric will impact corporate investment plans, including capex and hiring. I still don’t think the trade wars will escalate sufficiently to derail the broad economic growth trajectory; there is just too much pain that China and the EU would have to endure at a time when they are both seeking to deleverage without stunting growth. So, we will soon see what the corporate chieftains decide to do, hopefully creating the virtuous circle of supply begetting demand begetting more supply, and so on. Furthermore, the compelling valuations on the underappreciated market segments may be simply too juicy to pass up – unless you believe there’s an imminent recession coming. For my money, I still prefer the good ol’ USA for investing, and I think there is sufficient domestic and global demand for both US fixed income and equities, especially small caps.

In this periodic update, I provide a market commentary, offer my technical analysis of the S&P 500, review Sabrient’s latest fundamentals-based SectorCast rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. In summary, our sector rankings still look bullish, while the sector rotation model has returned to a bullish posture as investors position for a robust Q2 earnings season. Read on....

by Scott Martindale
President, Sabrient Systems LLC

The S&P 500 finished 2017 by completing an unusual feat. Not only was the index up +22% (total return), but every single month of the year saw positive performance on a total return basis, and in fact, the index is on a 14-month winning streak (Note: the previous record of 15 straight was set back in 1959!). So, as you might expect, volatility was historically low all year, with the VIX displaying an average daily closing value of 11 (versus a “fear threshold” of 15 and a “panic threshold” of 20). But some of 2017’s strength was due to expansion in valuation multiples in anticipation of tax reform and lower effective tax rates boosting existing earnings, not to mention incentives for repatriating overseas cash balances, expansion, and capex.

Sector correlations also remained low all year, while performance dispersion remained high, both of which are indications of a healthy market, as investors focus on fundamentals and pick their spots for investing – rather than just trade risk-on/risk-off based on the daily news headlines and focus on a narrow group of mega-cap technology firms (like 2015), or stay defensive (like 1H2016). And Sabrient’s fundamentals-based portfolios have thrived in this environment.

Now that the biggest tax overhaul in over 30 years is a reality, investors may do some waiting-and-watching regarding business behavior under the new rules and the impact on earnings, and there may be some normalization in valuation multiples. In other words, we may not see 20% gains in the S&P 500 during 2018, but I still expect a solidly positive year, albeit with some elevated volatility.

In this periodic update, I provide a market outlook, conduct a technical analysis of the S&P 500 chart, review Sabrient’s latest fundamentals-based SectorCast rankings of the ten US business sectors, and offer up some actionable ETF trading ideas. In summary, our sector rankings still look bullish, while the sector rotation model also maintains its bullish bias. Read on....

By Scott Martindale
President, Sabrient Systems LLC

July lived up to its history as a typically solid month for stocks, and 2H2017 is off to a strong start. Technology and Healthcare sectors continue to be the year-to-date leaders, and lately Utilities has gotten into the act on an income play as interest rates stay low. Large cap, mid cap, and small cap indices all continue to set all-time closing highs, while the CBOE Volatility Index (VIX) hit an all-time low last week. The 22,000 level on the Dow was just surpassed on a closing basis on Wednesday, and the 2,500 level on the S&P 500 beckons. Nasdaq has now shown positive performance in 11 of the past 13 months, so a little retrenchment is no surprise – if for no other reason but to take a breather and let other market segments play catch-up.

Although there are of course worrisome issues everywhere you look, the good news is that the global economy is strengthening, the Fed and other central banks are taking pains not to screw things up on their paths to “normalization,” and as a successful Q2 earnings season winds down, a weaker dollar should lead to a better Q3 than is currently forecasted. So, I would say that on balance, things continue to look encouraging. But as valuations in the mega caps (e.g., FAAMG) continue to rise, it finally may be time for small caps to seize the baton and start to outperform.

In this periodic update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review Sabrient’s weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable ETF trading ideas. In summary, our sector rankings still look bullish, while the sector rotation model maintains its bullish bias, and the climate overall still seems favorable for risk assets like equities. However, while I was optimistic about solid market performance going into July, I think August might be a different story if the new levels of psychological resistance fail to break and volatility rears its head in this typically-languid month. Read on....

By Scott Martindale
President, Sabrient Systems LLC

The year has begun with a continuation of the bullish optimism in equities. The new mood rewarding economically-sensitive market segments began with the big post-election rally – which was partly due to simply removing the election uncertainty and partly due to the “Trump Bump” and an expectation of a more business-friendly environment. Investors are playing a bit of wait-and-see regarding President Trump’s initial executive orders. Last week ended with a strong employment report and an executive order seeking to take the shackles off the banking industry (including dismantling of the Dodd-Frank Act and delay/review of the DOL Fiduciary Rule), which sent the Financial sector surging and led the Dow to close back above 20,000 and the NASDAQ Composite to new record highs, while the S&P500 struggles to breakout above the 2,300 level.

No doubt, the new Administration is shaking things up, as promised…and the left is pushing back hard, as promised. Nevertheless, I believe economic fundamentals are positive with a favorable environment for equities globally – especially fundamentals-based portfolios like Sabrient’s. I also like the prospects for small caps, European, and Japan.

In this periodic update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review Sabrient’s weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable ETF trading ideas. Overall, our sector rankings still look bullish, and the sector rotation model continues to suggest a bullish stance. Read on....

By Scott Martindale
President, Sabrient Systems LLC

Fear of missing out is suddenly the prevailing sentiment, overwhelming the previously dominant fear of an imminent selloff. I think this is due to a combination of: 1) uncertainty being lifted regarding the election, 2) domestic optimism about the US economy and business-friendly fiscal policies, 3) foreign investors seeing the US as the favored investment destination, 4) the expectation of rising inflation and interest rates rotating capital out of bonds and into stocks, and 5) a cautious but still accommodative Fed. Now that investors can focus on the many positive fundamentals instead of the news headlines, we are seeing healthy market breadth and diverse leadership led by value and small cap stocks rather than just the mega-cap growth stocks (e.g., “FANG”). Such sentiment has been a boon for fundamentals-based portfolios like Sabrient’s. But of course, everyone wants to know, how much further can this rally go? And what happens when it inevitably hits a wall?

In this periodic update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review Sabrient’s weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable ETF trading ideas. Overall, our sector rankings look slightly bullish as post-election adjustments to sell-side EPS estimates are gaining traction in the model, and the sector rotation model continues to suggest a bullish stance.