Scott Martindaleby Scott Martindale
President, Sabrient Systems LLC

From the standpoint of the performance of the broad market indexes, US stocks held up okay over the past four weeks, including a good portion of a volatile June. However, all was not well for cyclicals, emerging markets (including China), and valuation-driven active selection in general, including Sabrient’s GARP (growth at reasonable price) portfolios. Top-scoring cyclical sectors in our models like Financial, Industrial, and Materials took a hit, while defensive sectors (and dividend-paying “bond proxies”) Utilities, Real Estate, Consumer Staples, and Telecom showed relative strength. According to BofA’s Savita Subramanian, “June was a setback for what might have been a record year for active managers.” The culprit? Macro worries in a dreaded news-driven trading environment, given escalating trade tensions, increasing protectionism, diverging monetary policy among central banks, and a strong dollar. But let’s not throw in the towel on active selection just yet. At the end of the day, stock prices are driven by interest rates and earnings, and both remain favorable for higher equity prices and fundamentals-based stock-picking.

Some investors transitioned from a “fear of missing out” at the beginning of the year to a worry that things are now “as good as it gets” … and that it might be all downhill from here. Many bearish commentators expound on how we are in the latter stages of the economic cycle while the bull market in stocks has become “long in the tooth.” But in spite of it all, little has changed with the fundamentally strong outlook underlying our bottom-up quant model, characterized by synchronized global economic growth (albeit a little lower than previously expected), strong US corporate earnings, modest inflation, low global real interest rates, a stable global banking system, and of course historic fiscal stimulus in the US (tax cuts and deregulation), with the US displaying relative favorability for investments. Sabrient’s fundamentals-based GARP model still suggests solid tailwinds for cyclicals, and indeed the start of this week showed some strong comebacks in several of our top picks – not surprising given their lower valuations, e.g., forward P/E and PEG (P/E to EPS growth ratio).

Looking ahead, expectations are high for a big-league 2Q18 earnings reporting season. But the impressive 20% year-over-year EPS growth rate for the S&P 500 is already baked into expectations, so investor focus will be on forward guidance and how much the trade rhetoric will impact corporate investment plans, including capex and hiring. I still don’t think the trade wars will escalate sufficiently to derail the broad economic growth trajectory; there is just too much pain that China and the EU would have to endure at a time when they are both seeking to deleverage without stunting growth. So, we will soon see what the corporate chieftains decide to do, hopefully creating the virtuous circle of supply begetting demand begetting more supply, and so on. Furthermore, the compelling valuations on the underappreciated market segments may be simply too juicy to pass up – unless you believe there’s an imminent recession coming. For my money, I still prefer the good ol’ USA for investing, and I think there is sufficient domestic and global demand for both US fixed income and equities, especially small caps.

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 has returned to a bullish posture as investors position for a robust Q2 earnings season. Read on.... Read more about Sector Detector: Q2 earnings season brings anticipation of bullish breakout

Brent MillerBy Brent Miller, CFA
President & COO, Gradient Analytics (a Sabrient Systems company)

“Change is the law of life. And those who look only to the past or present are certain to miss the future.” – JFK

When evaluating the earnings quality of a given company, a forensic accounting firm like Gradient Analytics focuses on key indicators that may indicate that a company has taken liberties to cosmetically enhance its financial performance via aggressive revenue recognition and/or the understatement of expenses. Signals that a firm may be engaging in financial gamesmanship include:

  1. Divergence between reported earnings and free cash flow (i.e., an increase in accruals)
  2. Overstatement of assets
  3. Understatement of liabilities
  4. Negative or decelerating organic revenue growth
  5. Persistently widening gap between GAAP and non-GAAP EPS

In this article, I discuss a new amendment to the accounting standards that seeks to reduce inconsistencies and improve standardization of revenue recognition practices.  Read more... Read more about New Accounting Standard Changing Software & Telecom Industries

Q1 turned out to be one for the ages, and after some extreme moves and bouts of volatility, stocks settled down and closed out the quarter with a flourish. After falling more than -10% from the start of the year until February 11, the S&P 500 was up +6.6% in March, up +13% since February 11, and finished Q1 slightly positive at +0.8% -- and it is up +206% since the depths of March 9, 2009. Read more about Sector Detector: U.S. equities continue to attract capital as long-standing uncertainties abate

The Fed’s decision to not raise the fed funds rate at this time was ultimately taken by the market as a no-confidence vote on our economic health, which just added to the fear and uncertainty that was already present. Rather than cheering the decision, market participants took the initial euphoric rally as a selling opportunity, and the proverbial wall of worry grew a bit higher. Read more about Sector Detector: No rate hike translates into heightened wall of worry

Stocks are hitting new highs across the board, even though earnings reports have been somewhat disappointing. Actually, to be more precise, Q4 results have been pretty good, but it is forward guidance that has been cautious and/or cloudy as sales into overseas markets are expected to suffer due to strength in the US dollar. Read more about Sector Detector: Sector rankings stay neutral with few bullish catalysts on horizon

The market had a very rough opening this morning with the Dow down over 100 points and the S&P and Nasdaq looking weak.  Yet, the market rebounded a little, cutting some of the losses. Did you hear or read anything over the weekend that made you feel good about anybody solving the budget and debt issues soon?  We have 10 days!  Read more about What the Market Wants: Where is the Leadership?

david / Tag: BX, THO, CTSH, VZ, T, telecom / 0 Comments

It was yet another week of hanging around the1100 mark with the S&P500. It's not that there weren't important developments during the week. The trade deficit narrowed much more than expected, and retail sales got a substantial boost in November. Retailers alone sold $314.1 billion of goods, 1.4% more than in October and 2.2% more than a year earlier. Read more about What the Market Wants: Market Doesn’t Know What It Wants

david / Tag: CYBX, healthcare, KIRK, sectors, stock picks, telecom, utilities, WRLD, YUII / 0 Comments

Black Friday was black in more ways than one, with a number of negative events. Still the market held up reasonably well.  Perhaps there’s nowhere else to get an acceptable return on one’s cash. At least the stock market has shown some strength, and valuations with a few exceptions are reasonable from a historic perspective. Read more about What the Market Wants: Seeking a Reason to Rally

david / Tag: Dubai World, sectors, telecom, United Arab Emirates, UNS, VIV, VR, WRX / 0 Comments

Since the unemployment release of 10.2% on November 6, virtually all economic releases have been modestly positive and the late reporting companies have had strong results (including revenues) and strong guidance.  So why has the market been going up and down on a daily basis over the past week? Read more about What the Market Wants: Market in Strange Dance with the Dollar

david / Tag: AMMD, AMX, consumer staples, healthcare, materials, PBR, sector, technology, telecom, UVV / 0 Comments

By David Brown, Chief Market Strategist, Sabrient Systems, LLC

David Brown

David Brown

david / Tag: CNX, COCO, CYH, energy, financials, market stats, S&P500, sectors, technology, telecom, UVV / 0 Comments