by Scott Martindale
President, Sabrient Systems LLC

Volatility suddenly returned with a vengeance last week – to both stocks and bonds. In fact, on Wednesday, while the -3.1% single-day selloff in the S&P 500 didn’t quite equal the -4.1% fall on February 3, the normal “flight to safety” into US Treasuries when stocks sell off didn’t occur, which was quite distressing to market participants and pundits alike. But on Thursday, bonds caught a bid while equities continued their fall. Suddenly, talk has become more serious about the potential for slower global growth due to rising interest rates and escalating trade wars.

But has anything really changed from a fundamental standpoint? I would say, absolutely not. Although the risk-off rotation since June 11 continues to hold back Sabrient’s cyclicals-oriented portfolios, our quantitative model still suggests that little has changed with the fundamentally strong outlook characterized by global economic growth, impressive US corporate earnings, modest inflation, low real interest rates, a stable global banking system, and historic fiscal stimulus in the US (including both tax relief and deregulation). Moreover, it appears to me that equities are severely oversold, and now is a good time to be accumulating high-quality stocks with attractive forward valuations from the cyclical sectors and small caps.

When a similar correction happened in February, the main culprits were inflation worries and hawkish rhetoric from the Federal Reserve regarding interest rates. After all, the so-called “Fed Put” has long supported the stock market. But then the Fed commentary became less hawkish and more data-driven, which was helpful given modest inflation data, but the start of the trade war rhetoric kept the market from bouncing back with as much gusto as it had been displaying.

So, what caused the correction this time? Well, to an extent, bipartisan support for heightened regulation and consumer privacy protections hit some of the mega-cap InfoTech stocks that had been leading the market. But in my view, the sudden spikes in fear (and the VIX) and in Treasury yields and the resulting rush to the exit in stocks was due to a combination of the Federal Reserve chairman’s suddenly hawkish rhetoric about interest rates and China’s extreme measures to offset damage from its trade war with the US.

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 has switched to a neutral posture due to the recent correction. 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

Stocks have pushed to new highs yet again, given more positive signs of rising global GDP, strong economic reports here at home, another quarter of solid corporate earnings reports (especially those amazing mega-cap Tech companies), and an ever-improving outlook for passage of a tax reform bill. Likewise, inflows into U.S.-listed exchange-traded funds continued to reach heights never before seen, with the total AUM in the three primary S&P 500 ETFs offered by the three biggest issuers BlackRock, Vanguard, and State Street (IVV, VOO, SPY) having pushed above $750 billion. On the other hand, discussion on Monday of a potential “phase-in” period for lowering tax rates has had some adverse impact on small caps this week, given that they would stand to benefit the most.

Nevertheless, I still see a healthy broadening of the market in process, with expectation of some rotation out of the mega-cap Tech leaders (despite their incredible surge last Friday) and into attractively-valued mid and small caps. But that dynamic has suddenly taken a backseat (once again) to those amazingly disruptive Tech juggernauts, who simply refuse to give up the limelight. Turns out, elevated valuations, unsustainable momentum, and the “law of large numbers” (hindering their extraordinary growth rates) don’t seem to apply to these companies, at least not quite yet. Their ability to disrupt, innovate, take existing market share, and create new demand seems to know no bounds, with infinite possibilities ahead for the Internet of Things (IoT), artificial intelligence (AI), machine learning, Big Data, virtual reality, cloud computing, ecommerce, mobile apps, 5G wireless, smart cars, smart homes, driverless transportation, and so on….

Still, the awe-inspiring performance and possibilities of these mega-cap Techs notwithstanding, longer term I remain positive on mid and small caps. Keep in mind, in many cases the growth opportunities of these up-and-comers are largely tied to supplying the voracious appetites of the mega-caps. So, it is a way to leverage the continued good fortunes of the big guys, who eventually will have to pass the baton to other market segments that display more attractive forward valuation multiples.

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 latest fundamentals-based SectorCast rankings of the ten US business sectors, and then 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. A steady and improving global growth outlook continues to foster low volatility and an appetite for risk assets, while low interest rates should persist. Notably, BlackRock recently posted a market outlook with the view that the US economic growth cycle may continue for years to come, and I agree – so long as the worldwide credit bubble doesn’t suddenly spring a leak and upset the global economic applecart. Read on....

By Scott Martindale
President, Sabrient Systems LLC

Stocks continue to hold up well, encouraged by improving global fundamentals and a solid Q1 corporate earnings season. However, at the moment most of the major US market indices are struggling at key psychological levels of technical resistance that have held before, including Dow at 21,000, S&P 500 at 2,400, and Russell 2000 at 1,400. Only the Tech-heavy NASDAQ seems utterly undeterred by the 6,100 level, after having no problem blasting through the 6,000 level with ease last month and setting record highs almost daily. Perhaps the supreme strength in Tech will be able to lead the broader market through this tough resistance level. Every time it appears stocks are on the verge of a major correction, they catch a bid at an important technical support level. In other words, cautious optimism remains the MO of investors – despite weighty geopolitical risks and, here at home, furious political fighting at a level of viciousness I didn’t think possible in the U.S.

There is simply no denying the building momentum in broad global economic expansion, and any success in implementing domestic fiscal stimulus will just add even more fuel to this burgeoning fire. That’s not to say that we won’t see a nasty selloff at some point this year, but I think such an occurrence would have a news-driven (or Black Swan) trigger, and likely would ultimately serve as a broad-based buying opportunity.

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, while the sector rotation model has returned to a bullish bias even though stocks now struggle at strong psychological resistance levels.  Read more....

Volatility reigned in January on elevated volume as stock investors shifted their focus from global events to U.S. earnings reports, which have ranged from amazing (e.g., Apple) to crushing (e.g., Microsoft). Although the earnings reports have brought plenty of surprises, the volatility is no surprise, as I and many other market commentators predicted for the New Year.

Investors in U.S. equities seem to have embraced a new market paradigm in which upside spikes come more swiftly than the downside selloffs. Remember when it used to be the other way around? When fear was stronger than greed? The market is consolidating its gains off the early-October V-bottom reversal, and no one seems to be in any hurry to unload shares this time around, with the holidays rapidly approaching and all.

Today’s market opened up a tad on positive action from Asian and European markets; however, the pangs of last week’s painful performance took hold and the S&P 500 fell as much as 0.7%.  Earnings and revenues for Caterpillar (CAT) were below estimates causing investors to recall flat to poor results from General Electric (GE), International Business Machines (IBM) and McDonalds (MCD) on Friday.  Then, shortly into today’s session, Existing Home Sales o

That’s been hard to figure lately.  Uncertainty has not eased.  Not in Europe.  Not in the Middle East. Not in China or Japan. Not in the U.S., with a dead-heat election battle and unknown future Congressional dynamics.  Companies overall continue to beat earnings, mostly, and miss on revenues.  Now there is a certainty: earnings cannot keep going up if revenues keep going down.

Banks are the Market's Ball-and-Chain

By David Brown, Chief Market Strategist, Sabrient Systems

Seeking a New Catalyst

by David Brown, Chief Market Strategist, Sabrient Systems

The market sputtered into negative territory today (Monday), with the S&P 500 closing at 1142 (-0.57%). Still, the index is well above the 50-day and 200-day moving averages.