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

What a week. From its intraday all-time high on 2/19/20 to the intraday low on Friday 2/28/20, the S&P 500 fell -15.8%. It was a rare and proverbial “waterfall decline,” typically associated with a Black Swan event – this time apparently driven primarily by fears that the COVID-19 virus would bring the global economy to its knees. Once cases started popping up across the globe and businesses shuttered their doors, it was clear that no amount of central bank liquidity could help.

But in my view, it wasn’t just the scare of a deadly global pandemic that caused last week’s selloff. Also at play were the increasing dominance of algorithmic trading to exaggerate market moves, as well as the surprising surge in popularity of dustbin Bolshevik Bernie Sanders. I think both lent a hand in sending investors into a tizzy last week.

Even before fears of a pandemic began to proliferate, market internals were showing signs of worry. After a sustained and long-overdue risk-on rotation into the value factor, small-mid caps, and cyclical sectors starting on 8/27/19, which boosted the relative performance of Sabrient’s portfolios, investor sentiment again turned cautious in the New Year, even as the market continued to hit new highs before last week’s historic selloff. It was much the same as the defensive sentiment that dominated for most of the March 2018 — August 2019 timeframe, driven mostly by the escalating China trade war. (It seems like all market swoons these days are related to China!)

Alas, I think we may have seen on Friday a selling climax (or “capitulation”) that should now allow the market to recover going forward. In fact, the market gained back a good chunk of ground in the last 15 minutes of trading on Friday – plus a lot more in the afterhours session – as the extremely oversold technical conditions from panic selling triggered a major reversal, led by institutional and algorithmic traders. That doesn’t mean there won’t be more volatility before prices move higher, but I think we have seen the lows for this episode.

The selloff wasn’t pretty, to be sure, but for those who were too timid to buy back in October, you have been given a second chance at those similar prices, as the forward P/E on the S&P 500 fell from nearly 19.0x to 16.3x in just 7 trading days. Perhaps this time the broad-based rally will persist much longer and favor the risk-on market segments and valuation-oriented strategies like Sabrient’s Baker’s Dozen – particularly given our newly-enhanced approach designed to improve all-weather performance and reduce relative volatility versus the benchmark S&P 500.

In this periodic update, I provide a detailed market commentary (including other factors at play in the market selloff), discuss Sabrient’s new process enhancements, 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, our sector rankings look neutral, and our sector rotation model moved to a defensive posture when the S&P 500 lost support from its 200-day moving average. The technical picture has moved dramatically from grossly overbought to grossly oversold in a matter of a few days, such that the S&P 500 has developed an extreme gap below its 20-day moving average and the VIX is at an extreme high. Thus, I believe a significant bounce is likely.

As a reminder, you can find my latest Baker’s Dozen presentation slide deck and commentary at http://bakersdozen.sabrient.com/bakers-dozen-marketing-materials. Click to 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

As Q3 came to a close, investors continued to show cautious optimism and the S&P 500 posted a gain for the fourth straight quarter. After a lengthy period of time in which markets were buffeted by the daily news about oil prices, jobs reports, Fed rate hike intentions, China growth, Brexit, US economic expansion/contraction, Zika virus, and ISIS inspired attacks, the focus has switched back to improving fundamentals.

In particular, as Q3 earnings reporting season gets started, there remains a broad expectation that the corporate “earnings recession” has bottomed and that companies will start showing better earnings growth (hopefully driven by revenue growth), particularly in the beaten-down market segments like Energy and Materials. I think the only thing holding back stocks right now is investor uncertainty about market reaction to two things: a potential Trump presidential victory and to the next Fed rate hike (expected on December 14). From a technical standpoint, the spring is coiling tightly for big move.

In this periodic update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our 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 relatively bullish, although the sector rotation model still suggests a neutral stance.

By Scott Martindale
President, Sabrient Systems LLC

Overall, it appears that the stock market continues to focus more on improving fundamentals than on the daily news. We continue to see improved market breadth, low volatility, lower sector correlations, and capital flows into higher quality companies with solid fundamentals, attractive valuations, good earnings quality, and strong market position. Small and mid-caps have been leading market segments, especially those from the Energy sector. Among large caps, Technology and Financial sectors have been strong during Q3, while defensive sectors Utilities and Telecom have pulled back across all market caps after showing inordinate strength for much of the year (although they still remain strong YTD).

All of this is bullish – and is illustrative of the healthy broadening of the market. Although some traders appear to be taking some chips off the table in deference to September’s notoriety as the worst performing month of the year, I think the path of least resistance for stocks is to the upside.

In this periodic update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable ETF trading ideas.

The Wall of Worry just keeps adding more bricks. Although there has been much talk about the impact of low oil prices on the U.S. high yield debt market and by extension the U.S. banks that did the lending, the bigger worry now is the stability of the European banking system. It is like 2011 all over again. Also, there continue to be signs of an insidious corporate “earnings recession.” Such headlines add to the steady stream of “worry bricks” that have so confounded disciplined fundamental investors for at least the past seven months or so.

We all know the big news stories that have kept both corporate leaders and investors in a semi-state of paralysis. They involve the future of Greece in the Eurozone, China’s growth and stock market stability, and the Federal Reserve’s plan for gradually normalizing the fed funds rate. I noted in my article last week that the technical picture appeared to be firming up for the bulls as the 200-day moving average kicked in with solid support and traders seemed to be doing an orderly retreat-and-retrench rather than panic-selling.

As widely expected, the New Year has begun with plenty of volatility on high trading volume, as investors fear more than just a mild correction to start out the year. Despite the strong fundamentals here in the U.S., there are plenty of dangers around the rest of the world, and many fear that our cozy comfort at home simply cannot remain insulated for much longer.

Stocks continue to consolidate just under their prior high, which is offering formidable resistance. Although many long-standing uncertainties have significantly subsided, others have arisen, including turmoil in a new global hot spot (Ukraine) and the disruptions to the economy caused by the unusually long and brutal winter experienced by most of the U.S.

Earnings season is now officially underway, but the Fed is still holding the limelight, as traders anxiously awaited on Wednesday the FOMC minutes from the June 18/19 meeting. Although several members are pushing to begin tapering off this fall on asset purchases (bonds and mortgage-backed securities), which spooked the markets, in fact it now appears that the controlling opinion is that the U.S.