by Scott Martindale
  President & CEO, Sabrient Systems LLC

Investors have endured some unnerving gyrations in the stock market the past couple of weeks. Although the S&P 500 has fully recovered to achieve a new record high on Thursday at 3,960, the formerly high-flying Nasdaq is still 5% below its recent high. The CBOE Volatility Index (VIX) has managed to remain below the 30 handle throughout the turbulence, where it has held since the end-of-January pullback. I have been saying regularly that I am bullish on equities but also expect to see occasional bouts of volatility, and this latest bout was driven by a sudden spike in Treasury yields (to above 1.6% on the 10-year!) due to tepid investor interest in the Treasury auctions and new inflation worries. However, Wednesday’s 10-year auction went just fine, boosting investor comfort. Obviously, a rapid rise in interest rates would wreak havoc on a heavily leveraged US economy, and it would hurt equity valuations versus bonds – especially long-duration growth stocks, which is why the high-flying Tech stocks have borne the brunt of the damage.

Nevertheless, optimism reigns given the explosive combination of rapid vaccine rollout, falling infection rates, new therapeutics (like monoclonal antibodies bamlanivimab and etesevimab), accelerated reopening of the economy, and the massive new fiscal stimulus package, coupled with the Fed’s promise not to tighten – in fact, the Fed may implement yield curve control (YCC) to balance its desire for rising inflation with limits on debt service costs. I see the recent pullback (or “correction” for the Nasdaq Composite) as exactly the sort of healthy wringing-out of speculative fervor that investors wish for (as a new buying opportunity) – but then often are afraid to act upon.

The “reflation trade” (in anticipation of higher real interest rates and inflation during an expansionary economic phase) would suggest overweighting cyclical sectors (Materials, Energy, Industrials, and Financials), small caps, commodities, emerging markets, and TIPS, as well as some attractively valued Technology and Healthcare stocks that offer disruptive technologies and strong growth trends. But investors must be more selective among the high-fliers that sport high P/E multiples as they likely will need to “grow into” their current valuations through old-fashioned earnings growth rather than through further multiple expansion, which may limit their upside. In addition, I think it is prudent to hedge against negative real interest rates and dollar devaluation by holding gold, gold miners, and cryptocurrencies. I elaborate on this below.

Regardless, with Sabrient’s enhanced stock selection process, we believe our portfolios – including the current Q1 2021 Baker’s Dozen that launched on 1/20/21, Small Cap Growth portfolio that launches on 3/15/21, Sabrient Dividend portfolio that launches on 3/19/21, and the Q2 2021 Baker’s Dozen that will launch next month on 4/20/21 – are better positioned for either: (a) continued broadening and rotation into value, cyclicals, and small/mid-caps, or (b) a return to the narrow leadership from secular growth that has been so prevalent for so long.

As a reminder, you can go to http://bakersdozen.sabrient.com/bakers-dozen-marketing-materials to find my latest presentation slide deck and market commentary (which includes an update on the Q1 2020 Baker’s Dozen portfolio that terminates next month), as well as a “talking points” sheet that describes each of the 13 stocks in the newest Q1 2021 portfolio.

I am particularly excited about our new portfolios because, whereas last year we were hopeful based on our testing that our enhanced portfolio selection process would provide better “all-weather” performance, this year we have seen solid evidence (over quite a range of market conditions!) that a better balance between secular and cyclical growth companies and across market caps – combined with a few stellar individual performers – has indeed provided significantly improved performance relative to the benchmark (as I discussed in my January article).

In this periodic update, I provide a comprehensive market commentary, offer my technical analysis of the S&P 500 chart, review Sabrient’s latest fundamentals based SectorCast quant rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. To summarize, our outlook is bullish (but with occasional bouts of volatility, as we have been experiencing), our sector rankings reflect a solidly bullish bias, the technical picture is mixed (neutral to bullish near-term and long-term, but bearish mid-term), and our sector rotation model retains its bullish posture. Read on….

  by Scott Martindale
  President & CEO, Sabrient Systems LLC

Quick assessment:  We have an historic pandemic wreaking havoc upon the global economy, with many US states reversing their reopenings. We just got the worst ever quarterly GDP growth number, and jobless claims are resurging. The Federal Reserve is frantically printing money at breakneck pace to keep our government solvent, with M3 money supply growth having gone parabolic. We have a highly contentious presidential election that many consider to be the most consequential of our lifetimes. There is unyielding and unappeasable social unrest, with nightly rioting in the streets in many of our major cities. Tensions with China are again on the rise, with a new Cold War seemingly at hand. Hurricanes are threatening severe damage in states that are already reeling from a surge in COVID hospitalizations. And yet the Nasdaq 100 (QQQ) has burst out to new highs while the S&P 500 (SPY) is within 3% of its all-time high (although, quite notably, both of these cap-weighted indexes are dominated by a handful of mega-cap, disruptive juggernauts).

Of course, stocks have been bolstered by unprecedented congressional fiscal programs and Fed monetary support, including zero interest rate policy (ZIRP), open-ended quantitative easing (QE), de facto yield curve control (YCC), and the buying of corporate bonds (including junk bonds and fixed-income ETFs – and perhaps will include equity ETFs at some point). This de facto “Fed put” has induced a speculative fervor, FOMO (“fear of missing out”), and a TINA (“There is No Alternative!”) mindset for risk assets – particularly given infinitesimal bond yields and a falling dollar. Furthermore, while COVID cases have risen with the economy’s attempt at reopening, the death rate is down 75% since its peak in April, as the people being infected this time around are generally younger and less vulnerable and hospitals are better prepared.

However, we have witnessed extreme bifurcation in this market, with certain secular growth segments performing extremely well and hitting new all-time highs, while other segments are quite literally in a depression. And although the pandemic has exacerbated this situation, it has been developing for a while. As I have often discussed, when the trade war with China escalated in mid-2018, the market became highly bifurcated to seek the perceived safety of the dominant mega caps over smaller caps, growth over value, and secular growth Technology over the neglected cyclical growth sectors like Financials, Industrials, Materials, and Energy. It rotated defensive and risk-off even given the positive economic outlook. This is also when the price of gold began to ascend. Yes, gold has become much more than just a hedge; it now has its own secular growth story (as discussed below), which is why Sabrient’s new Baker’s Dozen for Q3 2020 includes a gold miner.

So, while Sabrient’s flagship Baker’s Dozen portfolios over the past two years have been dominated by smaller caps, the value factor, and cyclical sectors – to their detriment in this highly bifurcated market – you can see that our newer portfolios since the enhancements were implemented have been much more balanced among large, mid, and small caps, with a slight growth bias over value, and a balance between secular growth and cyclical growth companies.

In this periodic update, I provide a market commentary, offer my technical analysis of the S&P 500, and review Sabrient’s latest fundamentals-based SectorCast rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. In summary, while our sector rankings look neutral (as you might expect given the poor visibility for earnings), the technical picture is bullish, and our sector rotation model remains bullish.

As a reminder, Sabrient has introduced process enhancements to our forward-looking and valuation-oriented stock selection strategy to improve all-weather performance and reduce relative volatility versus the benchmark S&P 500, as well as to put secular-growth companies (which often display higher valuations) on more equal footing with cyclical-growth companies (which tend to display lower valuations). You can find my latest Baker’s Dozen slide deck and commentary on terminating portfolios at http://bakersdozen.sabrient.com/bakers-dozen-marketing-materials. To read on, click here....

As many investors enjoy the final weeks of summer, some optimistic bulls seem to be positioning themselves well ahead of Labor Day in anticipation of a fall rally. Indeed, last week’s action was impressive. After only a mere 4% correction, investors continued to brush off the disturbing violence both at home and abroad, and they took the minor pullback as their next buying opportunity.

Now that’s what I’m talking about. I have been discussing the overbought technical conditions of the S&P 500 for some time and the need for a pullback to test bullish support levels. And as many commentators have suggested, the more time between pullbacks, the more severe is the action when it finally arrives. Bears had become very hungry after a prolonged hibernation. This week offered up a nasty pullback.