• Asset Managers

    Sabrient offers quantitative, qualitative, and hybrid solutions for alpha generation and risk management.

    Asset Managers

  • Wealth Managers

    Sabrient tools and research enhance the investing experience for retail customers of brokerage firms, professional advisors, and private wealth managers.

    Wealth Managers

  • Fund Providers

    We create niche and macroeconomic index strategies for providers of ETFs and mutual funds.

    Fund Providers

  • Sector Detector

    Market analysis, technical analysis of the S&P 500, and SectorCast ETF rankings, written by Scott Martindale.
     

    Sector Detector

  • Financial Advisors

    We offer research, rankings, and tools on equities and ETFs for financial advisors and professional money managers.

    Advisors

October 2019 Baker’s Dozen Portfolio Launched

October 18, 2019: Sabrient Baker’s Dozen UIT Portfolio for October 2019 (FBMYUX) was launched by First Trust Portfolios on October 18, 2019. This portfolio, like all Baker's Dozen portfolios, comprises 13 top-ranked stocks from a cross-section of market caps and industries based on our GARP approach, i.e., growth at a reasonable price. Sabrient believes each of these stocks is positioned to perform well for the next 13 months. The portfolio will terminate on November 23, 2020. For more information and a fact sheet please visit First Trust Portfolios

New Sabrient Dividend UIT Launched  

October 7, 2019: A new Sabrient Dividend UIT Portfolio (Ticker: FGSCIX) – 29th in the series -- was launched by First Trust Portfolios on October 7, 2019. This UIT seeks companies with above-average total return through a combination of capital appreciation and dividend income. The stocks are selected through an investment strategy process developed by Sabrient. The portfolio will terminate on October 7, 2021. For more information, a prospectus, or a fact sheet, please visit First Trust Portfolios.

  Scott Martindaleby Scott Martindale
  President, Sabrient Systems LLC

The market this year has been oscillating between fear and optimism, risk-off and risk-on. Until 8/27/19, risk-off defensive sentiment was winning, but since that date a risk-on sentiment has taken hold, and the historic divergence favoring secular growth, low-volatility and momentum factors, defensive sectors, and large caps (i.e., late-stage economic cycle behavior) over cyclical growth, value and high-beta factors, cyclical sectors, and small-mid caps (i.e., expansionary cycle behavior) continues to reverse, as fickle investors have become optimistic about at least a partial resolution to the trade war (including the lifting of tariffs), an improving outlook for 2020-21 corporate earnings, and resurgent capital investment. Investors have moved from displaying tepid and fleeting signs of risk-on rotation to full-blown bullish enthusiasm and reluctance to sell in a fear of missing out (FOMO), even though the short-term technical picture has become overbought.

The late-August risk-on rotation came in the nick of time. Last year at that same time of the year, the S&P 500 was marching higher until peaking on 9/20/18, but it was doing so on the backs of defensive sectors along with secular-growth Tech mega-caps, and I was opining at the time that the rally would fizzle if there wasn’t some rotation into the risk-on cyclicals and small-mid caps – which as you know didn’t happen, leading to the Q4 selloff. But, happily, this year has played out quite differently.

Nevertheless, a lot of successful fundamentals-based strategies (including powerhouse quant firm AQR Capital, discussed below) really took it on the chin for the roughly 14-18 months preceding 8/27, ostensibly due to fear that a “late-cycle” economy was on the verge of recession. And indeed it was becoming a self-fulfilling prophesy, as the dominos seemed to be falling one by one:  escalating trade wars creating uncertainty leading to a global manufacturing slowdown, a hold-off in corporate capital spending, and negative interest rates overseas, which pushed global capital into US debt, which temporarily inverted the yield curve, which brought out the doomsaying pundits – all of which was beginning to negatively impact the previously-bulletproof consumer sentiment that had been carrying US GDP growth.

But it was all based on false pretenses, in my view, and investors now seem to be convinced that the bottom is in for the industrial cycle and the corporate earnings recession, and particularly for prices of value/cyclical stocks with solid fundamentals. Results haven’t been as bad as feared, and some of the macro clouds are parting. Ultimately, stock prices are driven by earnings expectations and interest rates (for discounted cash flow valuation), and as the external obstacles hindering the free market are lessened or removed, the outlook brightens. And when investors focus on the fundamentals rather than the latest tweet, CNN headline, or single economic number taken out of context, it bodes well for Sabrient’s value-tilted GARP (growth at a reasonable price) portfolios, which of course includes our flagship Baker’s Dozen.

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 still look neutral to me, while the longer-term technical picture remains bullish, and our sector rotation model retains a solidly bullish posture. Read on….

Ryan Frederick  by Ryan Frederick
  Equity Analyst, Gradient Analytics LLC (a Sabrient Systems company)

In 2003, the SEC first officially adopted rules (following Sarbanes-Oxley in 2002) related to the reporting of non-GAAP financial metrics. The new regulations called for a reconciliation of GAAP versus non-GAAP results to be included in various investor resources and to refrain from excluding non-recurring items from non-GAAP metrics if they are reasonably likely to reoccur, which is subject to wide interpretation. Since then, it seems the perceived importance among investors of non-GAAP financial performance has been elevated above traditional GAAP measures. Between 2015 and 2017, less than 10.0% of companies in the S&P 500 did not report a non-GAAP income calculation. However, the ability for management to subjectively decide what is or is not relevant to a company’s core business leaves plenty of room for earnings manipulation.

On the one hand, companies tend to justify their exclusion of various transactions as necessary for “comparability” to historical results, given that GAAP rules have changed over time. Fair enough. However, when an investor chooses to rely upon non-GAAP results when comparing a given company’s results to another’s, the comparisons can be deeply misleading as management has great leeway for subjective (and sometimes ad-hoc) adjustments in their exclusions – i.e., what one company concludes should be excluded in a non-GAAP calculation may not be consistent with what another company may exclude.

In fact, in 2010 former SEC chief accountant Howard Scheck identified non-GAAP performance metrics as a “fraud risk factor.” The SEC even created a taskforce to analyze non-GAAP earnings metrics that could be misleading. Then, in an effort to provide more clarity, the commission provided Compliance and Disclosure Interpretations (C&DIs) which detailed ways in which the SEC may find non-GAAP disclosures to be misleading, but more on that later.

Here at Gradient Analytics, our focus on earnings quality analysis (for both short idea generation and vetting of long candidates) regularly includes an examination of non-GAAP adjustments to determine whether they are appropriate in helping represent the true performance of the firm, or whether they are misleading. There is a plethora of unique adjustments a company could make to a non-GAAP income calculation; however, some are more common than others. One of the more frequent adjustments to GAAP income is the exclusion of restructuring costs. Read on….

  Scott Martindaleby Scott Martindale
  President, Sabrient Systems LLC

The early weeks of September were looking so promising as a brief but impressive surge gave hope of a revival in the long-neglected market segments. This sustained risk-on rotation seemed to be marking a bullish change of market character from the risk-off defensive sentiment that I have been writing about extensively for the past 18 months (ever since the China trade war escalated in June of last year), specifically the massive divergence favoring the low-volatility, growth, and momentum factors, defensive sectors, and large caps over the value and high-beta factors, cyclical sectors, and small-mid caps. But then, for the next few weeks, those risk-on market segments were once again lagging, as fickle investors keep returning to stocks displaying stronger balance sheets, high dividend yields, and/or secular growth stories – in spite of high valuations – rather than the more speculative cyclical growth stocks selling at attractive valuations that typically lead an upside breakout. It appeared that the fledging bullish rotation was caput – or perhaps not. Suddenly, there have been positive developments in the trade negotiations and in the Brexit saga, and the past several days have brought back renewed signs of a pent-up desire to take stocks higher. Signs of a better than expected Q3 earnings season may be the final catalyst.

Of course, although YTD returns in US stocks are impressive, if you look back over the past year to when the major indexes peaked in 3Q2018, stocks really have made very little headway. As of the close on Tuesday, the S&P 500 is +21.3% YTD but only +1.7% since its 2018 high on 9/20/18, while the more speculative Russell 2000 small cap index is still more than -12% below its all-time high from over a year ago – way back on 8/31/18. The biggest difference this year versus the 9/20/18 high for the S&P 500 is that Treasury yields have fallen (from 3.1% to about 1.8% on the 10-year), which has allowed for P/E multiple expansion (from 16.8x last year to 17.2x today) despite the earnings recession of the past three quarters.

I suppose one can hardly blame investors for their trepidation at this moment in time, given the overabundance of extremely negative news, which only expanded during Q3. We have an intractable trade war with the world’s second largest economy, intensifying protectionist rhetoric, North Korean missiles, rising tensions with Iran, a brewing war in northern Syria, drone attacks in Saudi Arabia, riots in Hong Kong, China’s feud with the NBA (and the animated TV show South Park!), a slowing global economy, a US corporate earnings recession, flattish yield curve, surging US dollar, low-yield/high-volatility Treasury bonds, falling consumer sentiment, Business Roundtable’s CEO Economic Outlook Index down six consecutive quarters (as hiring is strong but capital investment and sales expectations lag), the steepest contraction in the manufacturing sector since June 2009, UAW strike against General Motors (GM), looming Hard Brexit, top-polling Democratic candidates espousing MMT and business-unfriendly socialist policies, and yet another desperate attempt to impeach the President before the next election. Need I go on?

But somehow the US economy has maintained positive traction while stocks have held their ground given a persistent economic expansion, supported by dovish central banks around the world and a rock-solid US consumer. Indeed, the very fact that stocks have held up amid such a negative macro environment suggests to me that investors are just itching for a reason to rotate cash and pricey bonds into stocks – perhaps in a big way. And from a technical standpoint, such a long sideways consolidation over the past several months suggests that an upside breakout may be imminent – and likely led by those risk-on market segments. Notably, every such bullish rotation has helped Sabrient’s various growth-at-a-reasonable-price (GARP) portfolios gain ground against the SPY benchmark, so a sustained rotation would be quite welcome!

And some good news this week is offering some hope, with strong Q3 earnings reports from JPMorgan Chase (JPM) and UnitedHealth (UNH), a resumption in trade talks, progress in the GM strike, and a possible breakthrough in the Brexit negotiations. Moreover, the highly cyclical semiconductor and homebuilding industries are on fire, with iShares PHLX Semiconductor ETF (SOXX) setting a new high, and Treasury yields are creeping up.

By the way, our Sabrient Select SMA portfolio (separately managed account wrapper) is available to financial advisors as an alternative investment opportunity. The portfolio actively manages 25-35 stocks based on our “quantamental” GARP strategy. Let me know if you’d like more information.

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 now look neutral to me, while the technical picture remains bullish, and our sector rotation model retains a solidly bullish posture. Read on…

Scott Martindale  by Scott Martindale
  President, Sabrient Systems LLC

In case you didn’t notice, the past several days have brought an exciting and promising change in character in the US stock market. Capital has been rotating out of the investor darlings – including the momentum, growth, and low-volatility factors, as well as Treasury bonds and “bond proxy” defensive sectors – and into the neglected market segments like value, small-mid caps, and cyclical sectors favored by Sabrient’s GARP (growth at a reasonable price) model, many of which have languished with low valuations despite solid forward growth expectations. And it came just in the nick of time.

In Q3 of last year, the S&P 500 was hitting new highs and the financial press was claiming that investors were ignoring the trade war, when in fact they weren’t ignoring it at all, as evidenced by narrow leadership coming primarily from the mega-cap secular Technology names and large cap defensive sectors (risk-off). In reality, such market behavior was unhealthy and doomed to failure without a broadening into higher-beta cyclical sectors and small-mid caps, which is what I was opining about at the time. Of course, you know what happened, as Q4 brought about an ugly selloff. And this year, Q3 was looking much the same – at least until this sudden shift in investor preferences.

Last month, as has become expected given its typically low-volume summer trading, August saw increased volatility – and also brought out apocalyptic commentaries similar to what we heard from the talking heads in December. In contrast to the severely overbought technical conditions in July when the S&P 500 managed to make a new high, August saw the opposite, with the major indices becoming severely oversold and either challenging or losing support at their 200-day moving averages or even testing their May lows, as investors grew increasingly concerned about a protracted trade war, intensifying protectionist rhetoric, geopolitical turmoil, Hard Brexit, slowing global economy, and US corporate earnings recession. Utilities and Real Estate led, while Energy trailed. Bonds surged and yields plunged. August was the worst month for value stocks in over 20 years.

But alas, it appears it we may have seen a blow-off top in bonds, and Treasury yields may have put in a bottom. All of a sudden, the major topic of conversation among the talking heads this week has been the dramatic rotation from risk-off market segments to risk-on, which has been a boon for Sabrient’s Baker’s Dozen portfolios, giving them the opportunity to gain a lot of ground versus the S&P 500 benchmark. The Energy sector had been a persistent laggard, but the shorts have been covering as oil prices have firmed up. Financials have caught a bid as US Treasury prices have fallen (and yields have risen). Small cap value has been greatly outperforming large cap growth. It seems investors are suddenly less worried about a 2020 recession, ostensibly due to renewed optimism about trade talks, or perhaps due to the apparent resilience of our economy to weather the storm.

The question, though, is whether this is just a temporary reversion to the mean – aka a “junk rally,” as some have postulated – or if it is the start of a healthy broadening in the market and a rotation from the larger, high-quality but high-priced stocks (which have been bid up by overly cautious sentiment, passive index investing, and algorithmic trading, in my view), into the promising earnings growers, cyclicals, and good-quality mid and small caps that would normally lead a rising market. After all, despite its strong year-to-date performance, the S&P 500 really hasn’t progressed much at all from last September’s high. But a real breakout finally may be in store if this risk-on rotation can continue.

I think the market is at a critical turning point. We may be seeing a tacit acknowledgment among investors that perhaps the economy is likely to hold up despite the trade war. And perhaps mega-caps with a lot of international exposure are no longer the best place to invest. And perhaps those mega-caps, along with the defensive sectors that have been leading the market for so long, are largely bid up and played out at this point such that the more attractive opportunities now lie in the unjustly neglected areas – many of which still trade at single-digit forward P/Es despite solid growth expectations.

September is historically a bad month for stocks. It is the only month in which the Dow Jones Industrials index has averaged negative performance over the past 100 years, showing positive returns about 40% of the time (according to Bespoke Investment Group). But this budding rotation may be setting up a more positive outcome. I was on the verge of publishing this month’s article early last week, but the market’s sudden (and important!) change in character led me to hold off for a few days to see how the action unfolded, and I have taken a new tack on my content.

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 defensive to me, while the technical picture is short-term overbought but longer-term bullish, and the sector rotation model takes to a solidly bullish posture. Read on…

Scott Martindale  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…

Scott Martindale  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…

No front page content has been created yet.