by Scott Martindale
  President & CEO, Sabrient Systems LLC

Stocks continued their bullish charge from the pandemic selloff low on 3/23/20 into early-June, finally stumbling over the past several days due to a combination of overbought technicals, a jump in COVID cases as the economy tries to reopen, and the Fed giving grim commentary on the pace of recovery. But then of course Fed chair Jerome Powell (aka Superman) swooped in this week to save the day, this time to shore up credit markets with additional liquidity by expanding bond purchases into individual corporate bonds rather than just through bond ETFs. But despite unprecedented monetary and fiscal policies, there are many prominent commentators who consider this record-setting recovery rally to be an unwarranted and unsustainable “blow-off top” to a liquidity-driven speculative bubble that is destined for another harsh selloff. They think stocks are pricing in a better economy in the near-term than we enjoyed before the pandemic hit, when instead normalization is likely years away.

Certainly, the daily news and current fundamentals suggest that investors should stay defensive. But stocks always price a future vision 6-12 months in advance, and investors are betting on better times ahead. Momentum, technicals, fear of missing out (FOMO), and timely actions from our Federal Reserve have engendered a broad-based bullish foundation to this market that appears much healthier than anything displayed over the past five years, which was marked by cautious sentiment due to populist upheaval, political polarization, Brexit, trade wars, an attempt to “normalize” interest rates following several years of zero interest-rate policy (ZIRP), and the narrow leadership of the five famed mega-cap “FAAAM” Tech stocks – namely Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Alphabet (GOOG), and Facebook (FB).

Equal-weight indexes solidly outperformed the cap-weighted versions during the recovery rally from the selloff low on 3/23/20 through the peak on 6/8/20. For example, while the S&P 500 cap-weighted index returned an impressive +45%, the equal weight version returned +58%. Likewise, expanded market breadth is good for Sabrient, as our Baker’s Dozen portfolios ranged from +62% to +83% (and an average of +74%) during that same timeframe, led by the neglected small-mid caps and cyclical sectors. Our Forward Looking Value, Small Cap Growth, and Dividend portfolios also substantially outperformed – and all of them employ versions of our growth at a reasonable price (GARP) selection approach.

Although the past week since 6/8/20 has seen a pullback and technical consolidation, there remains a strong bid under this market, which some attribute to a surge in speculative fervor among retail investors. There is also persistently elevated volatility, as the CBOE Volatility Index (VIX) has remained solidly above the 20 fear threshold since 2/24/20, and in fact has spent most of its time in the 30s and 40s (or higher) even during the exuberant recovery rally. And until earnings normalize, the market is likely to remain both speculative and volatile.

Regardless, so long as there is strong market breadth and not sole dependence on the FAAAM stocks (as we witnessed for much of the past five years), the rally can continue. There are just too many forces supporting capital flow into equities for the bears to overcome. I have been predicting that the elevated forward P/E on the S&P 500 might be in store for further expansion (to perhaps 23-25x) before earnings begin to catch up, as investors position for a post-lockdown recovery. Indeed, the forward P/E hit 22.5x on 6/8/20. But I’d like to offer an addendum to this to say that the forward P/E may stay above 20x even when earnings normalize, so long as the economy stays in growth mode – as I expect it will for the next few years or longer as we embark upon a new post-recession expansionary phase. In fact, I believe that rising valuation multiples today, and the notion that the market actually has become undervalued, are a direct result of: 1) massive global liquidity, 2) ultra-low interest rates, and 3) the ever-growing dominance of secular-growth Technology on both our work processes and the broad-market indexes – all conspiring to create a TINA (“There is No Alternative”) climate for US equities.

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 moved to a bullish posture in late May.

As a reminder, Sabrient has enhanced its 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 firms (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.  Read on....

  by Scott Martindale
  President & CEO, Sabrient Systems LLC

Optimism reigns for the pandemic slowing and the economy reopening. And because stocks tend to be several months forward looking (and remarkably predictive, at that), April saw the best single-month performance for the S&P 500 in 33 years (+12.7%), while the Nasdaq saw its best month in 20 years (+15.4%). The S&P 500 Growth Index recorded its highest ever monthly return (+14.3%). In addition, gold and bitcoin have been rising as a hedge against all sorts of outcomes, including geopolitical instability, trade wars, de-globalization, unfettered monetary & fiscal liquidity (i.e., MMT), inflation, a weakening dollar, a “toppy” bond market, etc. (plus the periodic bitcoin “halving” event that occurs this week).

This impressive rally off the lows seems justified for several reasons:

1. the coronavirus, as bad as it is, falling well short of the dire lethality predictions of the early models and our ability to “flatten the curve”
2. massive monetary and fiscal policy support and the associated reduction in credit risk
3. low interest rates driving retirees and other income seekers into the higher yields and returns of stocks
4. household income holding up relatively well, as the main impact has been on lower wage workers who can’t work remotely (and government support should cover much of their losses)
5. escalation of tensions with China seems to be “all hat and no cattle” for now, with a focus on economic recovery
6. massive short covering and a bullish reversal among algorithmic traders
7. the growing dominance and consistent performance of the secular-growth Technology sector plus other “near-Tech” names (like Facebook and Amazon.com)
8. the steepening yield curve, as capital has gradually rotated out of the “bond bubble”

What the rally doesn’t have at the moment, however, is a strong near-term fundamental or valuation-based foundation. But although the current forward P/E of the S&P 500 of 20x might be overvalued based on historical valuations, I think in today’s unprecedented climate there actually is room for further multiple expansion before earnings begin to catch up, as investors position for a post-lockdown recovery.

In any case, it has been clear to us at Sabrient that the market has developed a “new normal,” which actually began in mid-2015 when the populist movement gained steam and the Fed announced a desire to begin tightening monetary policy. Investors suddenly become wary of traditional “risk-on” market segments like small-mid caps, value stocks, cyclical sectors, and emerging markets, even though the economic outlook was still strong, instead preferring to focus on mega-cap Technology, long-term secular growth industries, and “bond proxy” dividend-paying defensive sectors. And more recently, investor sentiment coming out of the COVID-19 selloff seems to be more about speculative optimism of a better future rather than near-term earnings reports and attractive valuation multiples.

In response, Sabrient has enhanced our forward-looking and valuation-oriented Baker’s Dozen strategy to improve all-weather performance and reduce relative volatility versus the benchmark S&P 500, as well as put secular-growth companies (which often display higher valuations) on more equal footing with cyclical-growth firms (which tend to display lower valuations). Those secular growth trends include 5G, Internet of Things (IoT), e-commerce, cloud computing, AI/ML, robotics, clean energy, blockchain, quantum computing, nanotechnology, genomics, and precision medicine. So, we felt it was necessary that our stock selection strategy give due consideration to players in these market segments, as well.

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

In this periodic update, I provide a market commentary, 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 now look defensive, and our sector rotation model maintains a neutral posture as it climbs from the depths of the selloff. Meanwhile, the technical picture remains bullish as it continues to gather speculative conviction on a better future, although with elevated volatility amid progress/setbacks as the economy tries to gradually reopen in the face of an ongoing coronavirus threat.  Read on....