by Scott Martindale
President, Sabrient Systems LLC

In my prior commentary in early May, I wrote that investors were aggressively bidding up stocks and appeared to have “stopped looking over their shoulders with fear and anxiety and are instead focused on the opportunities ahead.” The S&P 500 was retrenching after a breakout to new highs in preparation for a major upside move driven by a risk-on rotation – which I expected would bode quite well for Sabrient’s Baker’s Dozen portfolios that have been predominantly composed of stocks from growth-oriented cyclical sectors and small-mid caps. After all, recession fears had subsided, US and Chinese economic data were improving, Q1 corporate profits were coming in better than expected, the Fed had professed that it had our backs, and of course, a resolution to the US/China trade impasse was imminent. Or so it seemed. Instead, the month of May gave stocks a wild ride.

It was exactly one year ago that President Trump escalated the trade war with China from simple threats of tariffs to actual numbers and dates, which ignited a risk-off rotation and a starkly bifurcated market, as the S&P 500 large-cap index continued to rise on the backs of defensive sectors and mega-caps while risk-on cyclical sectors and small-mid caps sold off. The big oversold risk-on recovery following Christmas Eve began to peter out in late-April as the S&P 500 challenged its all-time high, but then the breakdown in negotiations in last month created another risk-off market reaction reminiscent of last summer. In other words, stocks and investor sentiment have been jerked around by Trump’s tweetstorms.

I talk a lot more about China and the trade war in today’s commentary, but the upshot is that this problem has been festering for a long time, and to his credit, President Trump decided he wasn’t going to continue the practice of kicking the can down the road to a future administration. China clearly (and dangerously) is intent on challenging the US for global dominance – economically, technologically, and militarily – with its powerful brand of state-sponsored capitalism. I support the cause against China’s unfair practices, given the enormous importance for our nation’s future – even though the resulting lengthy period of risk-off sentiment (essentially 9 of the past 12 months) has been challenging for Sabrient’s growth-and-valuation-driven portfolios (which are dominated by the neglected cyclical sectors and smaller caps), as the negative news stream creates a disconnect between analyst consensus earnings estimates and investor preferences. Fund flows instead suggest strong demand for low-volatility and momentum strategies as well as fixed income (tilted to shorter maturities and higher credit quality), and the 10-year TIPS breakeven inflation rate has fallen to 1.73% (as worries of deflation have set in).

In response to the recession fears and rampant defensive sentiment, the FOMC felt compelled last week to issue a highly accommodative statement that essentially said, we got your back, which turned around the fading stock market. Fed chairman Jay Powell asserted that the trade war is on the list of the committee’s concerns and that the central bank would “act as appropriate to sustain the expansion,” i.e., cut interest rates if necessary. This explicitly reestablished the proverbial “Fed put” as a market backstop, and investors liked it. We already are seeing a somewhat weaker dollar, which could be a further boost to US equities (especially those that sell internationally).

My view is that the May pullback was another buy-the-dip opportunity, particularly in risk-on market segments, as the pervasive worries about imminent global recession and a bear market caused by escalating trade wars have little basis in reality. The latest defensive rotation, including shunning of cyclical sectors, relative weakness in small caps, and global capital flight into Treasuries causing plunging yields (and a 3-mo/10-yr yield curve inversion), has been driven by uncertainty rather than hard data. Every piece of worsening economic data can be offset with encouraging data, in my view. Yes, the economic expansion (consecutive positive GDP prints) has been going on for a longer-than-average period of time, but there is no time limit on expansions, i.e., they don’t die of old age but rather from excesses and inflation that must be reined in (but there is nary of whiff of inflation anywhere in the developed world). I still expect that a resolution to the trade war will send stocks in general, and risk-on market segments in particular, into orbit … but until then, it is hard to predict when investor sentiment will again align with the still-solid fundamentals.

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 have turned neutral, while the sector rotation model retains its bullish posture. Read on…

by Scott Martindale
President, Sabrient Systems LLC

There is a stock market adage that says, “as goes January, so goes the year.” Well, if that comes true this year, we are in for some robust gains, as stocks just enjoyed the strongest January since 1987 (when it rose +13.2%). For the full month of January, the S&P 500 gained +8.0% (and S&P mid and small caps were even stronger at around +10.5%). Meanwhile, after a dismal 2H2018 in which Sabrient’s cyclicals-heavy portfolios trailed the broad market in the wake of a fear-driven defensive rotation that began in June, our 12 monthly all-cap Baker’s Dozen portfolios from 2018 handily outperformed by gaining an average of +11.8% for the full-month of January (and +19.7% since the low on Christmas Eve through 1/31, versus +15.2% for the SPY), and our actively-managed SMA portfolio (which holds 30 GARP stocks) gained +13.2%. Fundamentals seem to matter again, and institutional fund managers and corporate insiders have been suddenly scooping up shares of attractive-but-neglected companies in what they evidently see as a welcome buying opportunity.

On the other hand, it’s pretty clear to me that 4Q2018 was unnecessarily weak, with the ugliest December since the Great Depression, selling off to valuations that seem more reflective of an imminent global recession and Treasury yields of 5%. So, some might argue that January’s big rally was just a temporary bounce from massively oversold conditions – a case of “righting the ship” back to more appropriate valuations – and as such is giving us little indication about the balance of the year.

My view is more on the bullish side. When you combine earnings beats and stable or rising forward guidance with price declines, it sure seems to me that the worst is behind us, as investors recognize the opportunities before them and pay less attention to the gloomy news headlines and fearmongering commentators. Moreover, I expect to see a renewed appreciation for active management and a return to a more selective stock-picker’s market, with a rising stock market fueled by a de-escalation (or preliminary resolution) to the trade war with China and a more patient and accommodative Fed. In fact, as I said at the start of the year, I think the S&P 500 will finish the year with a gain in the 20-25% range – but savvy stock selection could produce even better returns. However, please be cognizant of 2018’s lesson that volatility is not dead, so try not to be alarmed when we encounter bouts of it over the course of the year.

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 remain slightly bullish, while the sector rotation model has returned to a neutral posture after a few months of defensiveness. Read on…

by Scott Martindale
President, Sabrient Systems LLC

After an “investor’s paradise” year in 2017 – buoyed by ultra-low levels of volatility, inflation, and interest rates, and fueled even more by the promise of fiscal stimulus (which came to fruition by year end) – 2018 was quite different. First, it endured a long overdue correction in February that reminded investors that volatility is not dead, and the market wasn’t quite the same thereafter, as investors’ attention focused on escalating trade wars and central bank monetary tightening, leading to a defensive risk-off rotation mid-year and ultimately to new lows, a “technical bear market” (in the Nasdaq and Russell 2000), and the worst year for stocks since the 2008 financial crisis. Then, it was confronted with the Brexit negotiations falling apart, Italy on the verge of public debt default, violent “yellow vest” protests in France, key economies like China and Germany reporting contractionary economic data, and bellwether companies like FedEx (FDX) and Apple (AAPL) giving gloomy sales forecasts that reflect poorly on the state of the global economy. The list of obstacles seems endless.

Moreover, US stocks weren’t the only asset class to take a beating last year. International equities fared even worse. Bonds, oil and commodities, most systematic strategies, and even cryptocurrencies all took a hit. A perfect scenario for gold to flourish, right? Wrong, gold did poorly, too. There was simply nowhere to hide. Deutsche Bank noted that 93% of global financial markets had negative returns in 2018, the worst such performance in the 117-year history of its data set. It was a bad year for market beta, as diversification didn’t offer any help.

Not surprisingly, all of this has weighed heavily upon investor sentiment, even though the US economy, corporate earnings, and consumer sentiment have remained quite strong, with no recession in sight and given low inflation and interest rates. So, despite the generally positive fundamental outlook, investors in aggregate chose to take a defensive risk-off posture, ultimately leading to a massive selloff – accentuated by the rise of passive investing and the dominance of algorithmic trading – that did huge technical damage to the chart and crushed investor sentiment.

But fear not. There may be a silver lining to all of this, as it has created a superb buying opportunity, and it may finally spell a return to a more selective stock-picker’s market, with lower correlations and higher performance dispersion. Moreover, my expectation for 2019 is for a de-escalation in the trade war with China, a more accommodative Fed, and for higher stock prices ahead. Forward valuations overall have become exceedingly attractive, especially in the cyclical sectors that typically flourish in a growing economy.

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 remain bullish, while the sector rotation model remains in a defensive posture. Read on…

by Scott Martindale
President, Sabrient Systems LLC

Last week was the market’s worst since March. After Q3 had zero trading days with more than 1% move (up or down), our cup runeth over in Q4 with the stock rollercoaster so far offering up 22 days that saw a 1% move. Volatility seems rampant, but the CBOE Volatility Index (VIX) has not even eclipsed the 30 level during Q4 (whereas it hit 50 back in February). Even after Friday’s miserable day, the VIX closed at 23.23. Of course, the turbulence has been driven primarily by two big uncertainties: the trade dispute with China and the Federal Reserve’s interest rate policy, both of which have the potential to create substantial impacts on the global economy. As a result, investor psychology and the technical picture have negatively diverged from a still solid fundamental outlook.

For about a minute there, it seemed that both situations had been somewhat diffused, with Presidents Trump and Xi agreeing at the G20 summit to a temporary truce on further escalation in tariffs, while Fed chairman Powell made some comments about the fed funds rate being “just below” the elusive neutral rate. But investors’ cheers soon switched back to fears (soon to be tears?) with the latest round of news headlines (e.g., Huawei CFO arrest, Trump’s “Tariff Man” comment, Mueller indictments, and the imminent federal debt ceiling showdown). The uncertainty and fear-mongering led to a buyers’ strike that emboldened the short sellers, which in turn triggered forced selling in passive ETFs and automated liquidation in quant hedge funds, high-frequency trading (HFT) accounts, and leveraged institutional portfolios, which removed liquidity from the system (i.e., no bids), culminating in a retail investor panic. As it stands today, the charts look woefully weak and investor psychology has turned bearish, with selling into rallies rather than buying of dips.

Ever since June 11, when the trade war with China escalated from rhetoric to reality, stocks have seen a dramatic risk-off defensive rotation, with Healthcare, Utilities, Consumer Staples, and Telecom the only sectors in positive territory and the only ones outperforming the broad S&P 500 Index. It’s as if investors see the strong GDP prints, the +20% corporate earnings growth (of which about half is organic and half attributable to the tax cut), record profitability, and record levels of consumer confidence and small business optimism as being “as good as it gets,” i.e., just a fleeting final gasp in a late-stage economy, rather than the start of a long-awaited boom cycle fueled by unprecedented fiscal stimulus and a still-supportive (albeit not dovish) Federal Reserve. As a result, forward P/E on the S&P 500 is down a whopping -19% this year, which is huge – especially considering this year’s stellar earnings reports and solid forward guidance.

But has anything really changed substantially with regard to expectations for corporate earnings and interest rates (the two most important factors) to so severely impact valuations? Not that I can see. And Sabrient’s quantitative rankings imply that the economy and forward guidance remain quite strong, such that the market is simply responding to the proverbial Wall of Worry by offering up a nice buying opportunity, particularly in beaten down cyclical sectors and in solid dividend payers – although there might be some more pain first. Over the past 10 years of rising stock prices since the Financial Crisis, there have been eight corrections of roughly -10% (including nearly -20% in 2011), and this year’s correction has led to the fourth major drawdown for Sabrient’s Baker’s Dozen annual top picks list (1Q2009, mid-2011, 2H2015, and now). But selling at each of those previous times would have been the wrong thing to do, and this time seems no different.

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 remain bullish, while the sector rotation model remains in a defensive posture due to the persistent market weakness. Read on...

by Scott Martindale
President, Sabrient Systems LLC

Some investors transitioned from a “fear of missing out” (aka FOMO) at the beginning of the year to a worry that things are now “as good as it gets” – meaning that the market is in its last bullish move before the inevitable downturn kicks in. And now, escalating trade wars and a flattening yield curve have added to those fears. However, it appears to me that little has changed with the fundamentally strong outlook characterized by global economic growth, strong US corporate earnings, modest inflation, low real interest rates, a stable global banking system, and historic fiscal stimulus in the US (including both corporate tax cuts and deregulation). Moreover, the Fed may be sending signals of a slowing of rate hikes, while great strides have been made in reworking trade deals.

Many followers of Sabrient are wondering why our Baker’s Dozen portfolios – most of which had been performing quite well until mid-June – suddenly saw performance go south even though the broad market averages have managed to achieve new highs. Their concerns are understandable. However, if you look under the hood of the S&P 500, leadership over the past three months has not come from where you would expect in a robust economy. An escalation in trade wars (moving from posturing to reality) led industrial metals prices to collapse while investors suddenly shunned cyclical sectors in favor of defensive sectors in a “risk-off” rotation, along with some of the mega-cap momentum Tech names. This was not healthy behavior reflecting the fundamentally-strong economy and reasonable equity valuations.

But consensus forward estimates from the analyst community for most of the stocks in these cyclical sectors have not dropped, and in fact, guidance has generally improved as prices have fallen, making forward valuations much more attractive. Sabrient’s fundamentals-based GARP (growth at a reasonable price) model, which analyzes the forward estimates of the analyst community, still suggests solid tailwinds and an overweight in cyclical sectors. Thus, we expect that investor sentiment will eventually fall in line and we will see a “risk-on” rotation back into cyclicals as the market once again rewards stronger GARP qualities rather than just the momentum or defensive names. In other words, we think that now is the wrong time to exit our cyclicals-heavy Baker’s Dozen portfolios. I talk a lot more about this in today’s commentary.

Of course, risks abound. One involves divergent central bank monetary policies, with some continuing to ease while others (including the US and China) begin a gradual tightening process, and the enormous impact on currency exchange rates. Moreover, the gradual withdrawal of massive liquidity from the global economy is an unprecedented challenge rife with uncertainty. Another is the high levels of global debt (especially China) and escalating trade wars (most importantly with China). Because China is mentioned in every one of these major risk areas, I talk a lot more about China in today’s commentary.

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 now look even more strongly bullish, while the sector rotation model retains its bullish posture. Read on....

by Scott Martindale
President, Sabrient Systems LLC

The secular bull market that began on March 9, 2009 in the wake of the Financial Crisis just passed its ninth anniversary last Friday, and as if to celebrate, stocks rallied big on the strong reports of jobs growth, total employment, and labor participation, while wage inflation remained modest. All in all, it was a lot of great news, but instead of selling off – as stocks have done in the past in a “good news means bad news” reaction, assuming the Fed would feel emboldened to raise rates more aggressively – stocks rallied strongly. This is a market of investors looking for reasons to buy rather than to sell, i.e., the bulls are still in charge.

Strong global fundamentals are firmly in place for the foreseeable future, while corporate earnings expectations continue to rise, inflation fears appear to have diminished, and the overall climate remains favorable for equities. After the February selloff was complete, extreme valuations had been reduced, and support levels had been tested, investors were ready to embrace good news – albeit with some renewed caution in the wake of the recent surge in volatility. As we all learned, volatility is not dead. VIX is an oscillator that always eventually mean-reverts. This will surely result in some deleveraging as well as perhaps some P/E compression from the run-up in valuations we saw in anticipation of the fiscal stimulus package.

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 regained its bullish bias during the recovery from the market correction and volatility surge. Read on....

by Scott Martindale
President, Sabrient Systems LLC

Many market commentators have been in a prolonged tizzy, warning of an inevitable selloff to come. And indeed we finally got one, with a huge spike in volatility. A climate of low inflation and structurally low interest rates has meant less discounting of future corporate earnings, which has allowed for higher enterprise values and stock prices. But when inflation fears suddenly popped up, investors feared an imminent repricing of equities at lower multiples. As I wrote at the start of the year, I expected some renewed volatility and compression in valuation multiples to occur during 2018, but I sure didn’t expect it to happen quite so soon. However, I also said that a correction would be healthy, and that it won’t necessarily be as deep of a selloff as so many investors have feared – and I stand by that prediction.

So, what is going on here? I think there were a few catalysts. First, the dollar has been plummeting on inflation worries, chasing away global fixed income investors and spiking yields, which put elevated equity valuations into question. Second, a healthy technical correction from January’s parabolic uptrend in stock prices spiked volatility to such a degree that the inverse VIX ETF/ETNs imploded, revealing structural problems with some of these products that not only spooked institutional investors but also triggered some abrupt changes to tactical equity exposures in their algorithmic trading models. And then we heard some FOMC members making statements implying that perhaps there is no longer a “Fed Put” supporting the market. It’s no wonder the long-expected correction finally (and quite suddenly) came about.

Given that the price chart had gone parabolic, it shouldn’t be too much of a surprise that volatility raised its ugly head, with the CBOE Market Volatility Index (VIX) briefly spiking above 50, much like an overstretched rubber band snaps back, and with sector correlations rising sharply. Nevertheless, I still expect solidly positive performance in the broad market indices by year end, although significantly lower than last year’s +22% performance on the S&P 500, and perhaps only in the high single digits. I also believe that heightened volatility and some compression in the broad market valuation multiples will lead to greater market breadth and lower sector correlations as investors pick their spots outside of the mega-caps (or passive index investing) and seek out higher returns in stocks that display strong growth prospects at a reasonable price (i.e., GARP) – with realistic potential for gains in the 15-25% range (or even higher).

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 moved to a neutral bias in response to the market turbulence. 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

The major US stock indexes continue to hold near their highs, awaiting the next upside catalyst, supported by persistently low interest rates, record share buybacks, net solid economic reports, and continued organic growth in corporate earnings – in spite of disappointments in the fiscal policy front. The S&P 500 has held solidly above 2,400, the Dow has stayed above 21,000, the Russell 2000 has held 1,400, the Tech-heavy Nasdaq Composite has held 6,000 despite a severe pullback in the market-leading large-cap Tech stocks, and oil has held above the critical $40 mark despite being in a general downtrend since the start of the year.

Recent momentum resides in Transportation, Financial, and small caps, which is a bullish development. In fact, the Dow Jones Transportation Average is setting new highs and is in full-on breakout mode.

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 slightly bullish, while the sector rotation model maintains its bullish bias and the climate overall still seems favorable for risk assets like equities – particularly dividend payers, small caps, and GARP stocks (i.e., growth companies among all caps selling at attractive forward PEG ratios). Moreover, July is typically a solid month for stocks, a strong first half typically bodes well for the second half, and the technical picture still looks favorable. Read on...

By Scott Martindale
President, Sabrient Systems LLC

In late May, the major US stock indexes finally eclipsed those pesky psychological levels and hit new highs, and this week they have managed to maintain the breakout even in the face of James Comey’s Congressional testimony and the British election, not to mention more saber-rattling from North Korea. The S&P 500 has held above 2,400, and the Dow has maintained the 21,000 level. The ultra-strong and Tech-heavy Nasdaq regained 6,300 and the Russell 2000 small caps moved back above 1,400 after both briefly pulling back below to test support early in the week. They both showed notable strength on Thursday after the James Comey testimony. Such backing-and-filling and technical consolidation was inevitable given that the proverbial “rubber band” was stretched so tight, with price rising well above the moving averages.

With the strength in Nasdaq, it should come as no surprise that the Technology sector has been by far the top performing sector, up about +22% year to date, while Energy has struggled, falling about -15% YTD. Notably, on Wednesday, oil prices fell more than 4% due to an unexpected rise in U.S. crude inventories.

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. Volatility remains historically low, economic conditions continue to improve, and overall, the climate seems quite favorable for risk assets like equities – particularly dividend payers, small caps, and GARP stocks (i.e., growth companies among all caps selling at attractive forward PEG ratios). Read on....