by Scott Martindale
  President, Sabrient Systems LLC

July was yet another solid month for stocks, as the major market indexes eclipsed and held above psychological barriers, like the S&P 500 at 3,000, and the technical consolidation at these levels continued with hardly any give back at all. But of course, the last day of July brought a hint of volatility to come, and indeed August has followed through on that with a vengeance. As the old adage goes, “Stocks take the stairs up but ride the elevator down,” and we just saw a perfect example of it. The technical conditions were severely overbought, with price stretched way above its 20-day simple moving average, and now suddenly the broad indexes (S&P 500, Dow, Nasdaq) are challenging support at the 200-day moving average, while the small cap Russell 2000 index has plummeted well below its 200-day and is now testing its May low.

For the past 18 months (essentially starting with the February 2018 correction), investor caution has been driven by escalating trade wars and tariffs, rising global protectionism, a “race to the bottom” in currency wars, and our highly dysfunctional political climate. However, this cautious sentiment has been coupled with an apparent fear of missing out (aka FOMO) on a major market melt-up that together have kept global capital in US stocks but pushed up valuations in low-volatility and defensive market segments to historically high valuations relative to GARP (growth at a reasonable price), value, and cyclical market segments. Until the past few days, rather than selling their stocks, investor have preferred to simply rotate into defensive names when the news was distressing (which has been most of the time) and then going a little more risk-on when the news was more encouraging (which has been less of the time). I share some new insights on this phenomenon in today’s article.

The market’s gains this year have not been based on excesses (aka “irrational exuberance”) but instead stocks have climbed a proverbial Wall of Worry – largely on the backs of defensive sectors and mega-caps and fueled by persistently low interest rates, and mostly through multiple expansion rather than earnings growth. In addition, the recent BAML Global Fund Manager Survey indicated the largest jump in cash balances since the debt ceiling crisis in 2011 and the lowest allocation ratio of equities to bonds since May 2009, which tells me that deployment of this idle cash and some rotation out of bonds could really juice this market. It just needs that elusive catalyst to ignite a resurgence in business capital spending and manufacturing activity, raised guidance, and upward revisions to estimates from the analyst community, leading to a sustained risk-on rotation.

As a reminder, I am always happy to take time for conversations with financial advisors about market conditions, outlook, and Sabrient’s portfolios.

In this periodic update, I provide a detailed 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 look neutral to me (i.e., neither bullish nor defensive), while the sector rotation model retains a bullish posture. Read on…

  by Scott Martindale
  President, Sabrient Systems LLC

The major cap-weighted market indexes continue to achieve new highs on a combination of expectations of interest rate cuts and optimism about an imminent trade deal with China. Bulls have been reluctant to take profits off the table in an apparent fear of missing out (aka FOMO) on a sudden market melt-up (perhaps due to coordinated global central bank intervention, including the US Federal Reserve). But investors can be forgiven for feeling some déjà vu given that leadership during most of the past 13 months did not come from the risk-on sectors that typically lead bull markets, but rather from defensive sectors like Utilities, Staples, and REITs, which was very much like last summer’s rally – and we all know how that ended (hint: with a harsh Q4 selloff). In fact, while the formerly high-flying “FAANG” group of Tech stocks has underperformed the S&P 500 since June 2018, Barron’s recently observed that a conservative group of Consumer sector stalwarts has been on fire (“WPPCK”) – Walmart (WMT), Procter & Gamble (PG), PepsiCo (PEP), Costco (COST), and Coca-Cola (KO).

This is not what I would call long-term sustainable leadership for a continuation of the bull market. Rather, it is what you might expect in a recessionary environment. When I observed similar behavior last summer, with a risk-off rotation even as the market hit new highs, I cautioned that defensive stocks would not be able to continue to carry the market to new highs (with their low earnings growth and sky-high P/E ratios), but rather a risk-on rotation into cyclical sectors and small-mid caps would be necessary to sustain the uptrend. Instead, the mega-cap Tech names faltered and the market went into a downward spiral. Many analysts and pundits have been forecasting the same for this year.

But when I hear such widespread pessimism, the contrarian voice in my head speaks up. And indeed, the FAANG names – along with powerhouse Microsoft (MSFT) and cyclicals like Semiconductors, Homebuilders, and Industrials – have been showing leadership again so far this year, especially after that historic market upswing in June. Rather than an impending recession, it seems to me that the US economy is on solid footing and “de-coupling” from other developed markets, as First Trust’s Brian Wesbury has opined.

The US economic expansion just became the longest in history, the latest jobs report was outstanding, unemployment remains historically low, business and consumer confidence are strong, institutional accumulation is solid, and the Federal Reserve is a lock to lower interest rates at least once, and more if necessary (the proverbial “Fed Put”). Indeed, the old adages “Don’t fight the Fed!” (as lower rates support both economic growth and higher equity valuations) and “The trend is your friend!” (as the market hits new highs) are stoking optimism and a critical risk-on rotation, leading the S&P 500 this week to touch the magic 3,000 mark and the Dow to eclipse 27,000. If this risk-on rotation continues, it bodes well for Sabrient’s cyclicals-oriented portfolios.

In this periodic update, I provide a detailed 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 look neutral to me (i.e., neither bullish nor defensive), while the sector rotation model retains a bullish posture. Read on…

by Scott Martindale
President, Sabrient Systems LLC

You might not have realized it given the technical consolidation in March, but Q1 2019 ended up giving the S&P 500 its best Q1 performance of the new millennium, and the best quarterly performance (of any quarter) since Q3 2009. Investors could be forgiven for thinking the powerful rally from Christmas Eve through February was nothing more than a proverbial “dead cat bounce,” given all the negative news about a global economic slowdown, the still-unresolved trade skirmish with China, a worsening Brexit, reductions to US corporate earnings estimates, and the Fed’s sudden about-face on rate hikes. But instead, stocks finished Q1 with a flourish and now appear to be poised to take another run at all-time highs. The S&P 500, for example, entered Q2 less than 4% below its all-time high.

Overall, we still enjoy low unemployment, rising wages, and strong consumer sentiment, as well as a supportive Fed (“Don’t fight the Fed!”) keeping rates “lower for longer” (and by extension, debt servicing expenses and discount rates for equity valuation) and maintaining $1.5 trillion in excess reserves in the financial system. Likewise, the ECB extended its pledge to keep rates at record lows, and China has returned to fiscal and monetary stimulus to revive its flagging growth stemming from the trade war. Meanwhile, Corporate America has been quietly posting record levels of dividends and share buybacks, as well as boosting its capital expenditures – which is likely to accelerate once a trade deal with China is signed (which just became more likely with the apparently-benign findings of the Mueller investigation). In addition, the bellwether semiconductor industry is presenting a more upbeat tone and an upturn from a cyclical bottom (due to temporary oversupply), while crude oil has broken out above overhead resistance at $60.

On the other hand, there is some understandable concern that US corporate earnings forecasts have been revised downward to flat or negative for the first couple of quarters of 2019. Of course, it would be preferable to see a continuation of the solid earnings growth and profitability of last year, but the good news is that revenue growth is projected to remain solid (at least 4.5% for all quarters), and then earnings is expected to return to a growth track in 2H2019. Moreover, the concurrent reduction in the discount rate (due to lower interest rates) is an offsetting factor for stock valuations.

All of this leads me to believe that economic conditions remain generally favorable for stocks. In addition, I think we may see upside surprises in Q1 and Q2 earnings announcements, especially given the low bar that has been reset. But it also may mean that investors will become more selective, with some stocks doing quite well even if the broad market indexes show only modest growth this year.

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 and the technical picture suggests an imminent upside breakout, while the sector rotation model maintains its a bullish posture. Read on…

By Scott Martindale
President, Sabrient Systems LLC

Another day, another new high in stocks. Some observers understandably think this is a sign of excessive complacency and a bad omen of an imminent major correction, as valuations continue to escalate without the normal pullbacks that keep the momentum traders under control and “shake out the weak holders,” as they say. But markets don’t necessarily need to sell off to correct such inefficiencies. Often, leadership just needs to rotate into other neglected segments, and that is precisely what has been happening since the mid-August pullback. Witness the recent leadership in small caps, transports, retailers, airlines, homebuilders, and value stocks, as opposed to the mega-cap technology-sector growth stocks that have been driving the market most of the year.

Yes, the cap-weighted Dow Industrials and S&P 500 have both notched their eighth straight positive quarter, and the Nasdaq achieved its fifth straight, and all of them are dominated by mega-cap stocks. And the new highs have just kept coming during the first week of October. But it’s the stunning strength in small caps that is most encouraging, as this indicates a healthy broadening of the market, in which investors “pick their spots” rather than just blindly ride the mega caps. Rising global GDP, strong economic reports, solid corporate earnings reports, and the real possibility of tax reform have all helped goose bullish sentiment.

Those of you who have read my articles or attended my live presentations on the road know that I have been positive on small caps and that the momentum trade so far this year and high valuations among the mega cap Tech stocks likely would become self-limiting, leading to a passing of the baton to other market segments that still display attractive multiples, particularly those that would benefit the most from any sort of new fiscal stimulus (including tax and regulatory reform), like small caps. Moreover, I believe that with a still-accommodative Federal Reserve moving cautiously on interest rates, and with strong global demand for US Treasuries and corporate bonds, the low-yield environment is likely to persist for the foreseeable future.

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 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 also maintains its bullish bias, and the overall climate continues to look favorable for risk assets like equities. Although October historically has been a month that can bring a shock to the market, it also is on average one of the strongest months for stocks, and of course Q4 is seasonally a bullish period. Read on...

Given all the geopolitical drama and worrisome news headlines – ranging from tensions with Russia and North Korea to “Brexit 2.0” and “Frexit” to uncertainties of Trump’s fiscal stimulus to the looming debt ceiling – it’s no wonder stocks have stalled for the past several weeks. Especially troubling is the notable underperformance since March 1 in small caps and transports. Nevertheless, economic fundamentals both globally and domestically are still solid. Global growth appears to be on a positive trend that could persist for the next couple of years, and Q1 earnings season should reflect impressive year-over-year corporate earnings growth, although not without its disappointments – as we already have seen in bellwethers like Goldman Sachs (GS), Johnson & Johnson (JNJ), and International Business Machines (IBM).

I continue to like the prospects for US equities for the balance of the year. I expect breadth will be solid, correlations will stay low, and dispersion high such that risk assets continue to look attractive, including high-quality dividend payers and growth stocks, particularly small caps, which I think will ultimately outperform this year despite their recent weakness. All of this bodes well for stock-pickers.

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, although the sector rotation model has, at least temporarily, moved to a neutral stance as the short-term technical picture has become cloudy. But after the pro-EU election results in France on Sunday, stocks may be ready for an upside breakout, no matter what Trump accomplishes in this final week of his first 100 days on the job.  Read on....

By Scott Martindale
President, Sabrient Systems LLC

The year has begun with a continuation of the bullish optimism in equities. The new mood rewarding economically-sensitive market segments began with the big post-election rally – which was partly due to simply removing the election uncertainty and partly due to the “Trump Bump” and an expectation of a more business-friendly environment. Investors are playing a bit of wait-and-see regarding President Trump’s initial executive orders. Last week ended with a strong employment report and an executive order seeking to take the shackles off the banking industry (including dismantling of the Dodd-Frank Act and delay/review of the DOL Fiduciary Rule), which sent the Financial sector surging and led the Dow to close back above 20,000 and the NASDAQ Composite to new record highs, while the S&P500 struggles to breakout above the 2,300 level.

No doubt, the new Administration is shaking things up, as promised…and the left is pushing back hard, as promised. Nevertheless, I believe economic fundamentals are positive with a favorable environment for equities globally – especially fundamentals-based portfolios like Sabrient’s. I also like the prospects for small caps, European, and Japan.

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, and the sector rotation model continues to suggest a bullish stance. Read on....