Scott Martindale  by Scott Martindale
  President & CEO, Sabrient Systems LLC

First off, I am pleased to announce that Sabrient’s Q1 2021 Baker’s Dozen portfolio launched on January 20th! I am particularly excited 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 has indeed provided significantly improved performance relative to the benchmark. Our secular-growth company selections have been notably strong, particularly during the periods of narrow Tech-driven leadership, and then later the cyclical, value, and smaller cap names carried the load as both investor optimism and market breadth expanded. I discuss the Baker’s Dozen model portfolio long-term performance history in greater detail in today’s post.

As a reminder, you can go to http://bakersdozen.sabrient.com/bakers-dozen-marketing-materials to find our “talking points” sheet that describes each of the 13 stocks in the new portfolio as well as my latest Baker’s Dozen presentation slide deck and commentary on the terminating portfolios (December 2019 and Q1 2020).

No doubt, 2020 was a challenging and often terrifying year. But it wasn’t all bad, especially for those who both stayed healthy and enjoyed the upper leg of the “K-shaped” recovery (in which some market segments like ecommerce/WFH thrived while other segments like travel/leisure were in a depression). In my case, although I dealt with a mild case of COVID-19 last June, I was able to spend way more time with my adult daughters than I previously thought would ever happen again, as they came to live with me and my wife for much of the year while working remotely. There’s always a silver lining.

With President Biden now officially in office, stock investors have not backed off the gas pedal at all.  And why would they when they see virtually unlimited global liquidity, including massive pro-cyclical fiscal and monetary stimulus that is likely to expand even further given Democrat control of the legislative triumvirate (President, House, and Senate) plus a dovish Fed Chair and Treasury nominee? In addition, investors see low interest rates, low inflation, effective vaccines and therapeutics being rolled out globally, pent-up consumer demand for travel and entertainment, huge cash balances on the sidelines (including $5 trillion in money market funds), imminent calming of international trade tensions, an expectation of big government spending programs, enhanced stimulus checks, a postponement in any new taxes or regulations (until the economy is on stronger footing), improving economic reports and corporate earnings outlooks, strong corporate balance sheets, and of course, an unflagging entrepreneurial spirit bringing the innovation, disruption, and productivity gains of rapidly advancing technologies.

Indeed, I continue to believe we are entering an expansionary economic phase that could run for at least the next few years, and investors should be positioned for both cyclical and secular growth. (Guggenheim CIO Scott Minerd said it might be a “golden age of prosperity.”) Moreover, I expect fundamental active selection, strategic beta ETFs, and equal weighting will outperform the cap-weighted passive indexes that have been so hard to beat over the past few years. If things play out as expected, this should be favorable for Sabrient’s enhanced growth-at-a-reasonable-price (aka GARP) approach, which combines value, growth, and quality factors. Although the large-cap, secular-growth stocks are not going away, their prices have already been bid up quite a bit, so the rotation into and outperformance of quality, value, cyclical-growth, and small-mid caps over pure growth, momentum, and minimum volatility factors since mid-May is likely to continue this year, as will a desire for high-quality dividend payers, in my view.

We also believe Healthcare will continue to be a leading sector in 2021 and beyond, given the rapid advancements in biomedical technology, diagnostics, genomics, precision medicine, medical devices, robotic surgery, and pharmaceutical development, much of which are enabled by 5G, AI, and 3D printing, not to mention expanding access, including affordable health plans and telehealth.

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 (although not without some bouts of volatility), the sector rankings reflect a moderately bullish bias, the longer-term technical picture remains strong (although it is near-term extended such that a pullback is likely), and our sector rotation model retains its bullish posture. Read on….

Scott Martindale  by Scott Martindale
  President & CEO, Sabrient Systems LLC

By some measures, the month of November was the best month for global stock markets in over 20 years, and the rally has carried on into December. Here in the US, the S&P 500 (SPY) gained +12.2% since the end of October through Friday’s close, while the SPDR S&P 400 MidCap (MDY) rose +18.1% and the SPDR S&P 600 SmallCap (SLY) +24.3%. In fact, November was the biggest month ever for small caps. Notably, the Dow broke through the magic 30,000 level with conviction and is now testing it as support. But more importantly in my view, we have seen a significant and sustained risk-on market rotation in what some have termed the “reopening trade,” led by small caps, the value factor, and cyclical sectors. Moreover, equal-weight indexes have outperformed over the same timeframe (10/30/20-12/11/20), illustrating improving market breadth. For example, the Invesco S&P 500 Equal Weight (RSP) was up +16.9% and the Invesco S&P 600 SmallCap Equal Weight (EWSC) an impressive +29.5%.

As the populace says good riddance to 2020, it is evident that emergency approval of COVID-19 vaccines (which were developed incredibly fast through Operation Warp Speed) and an end to a rancorous election cycle that seems to have resulted in a divided federal government (i.e., gridlocked, which markets historically seem to like) has goosed optimism about the economy and reignited “animal spirits” – as has President-elect Biden’s plan to nominate the ultra-dovish former Federal Reserve Chairperson Janet Yellen for Treasury Secretary. Interestingly, according to the WSJ, the combination of a Democratic president, Republican Senate, and Democratic House has not occurred since 1886 (we will know if it sticks after the Georgia runoff). Nevertheless, if anyone thinks our government might soon come to its collective senses regarding the short-term benefits but long-term damage of ZIRP, QE, and Modern Monetary Theory, they should think again. The only glitch right now is the impasse in Congress about the details inside the next stimulus package. And there is one more significant boost that investors expect from Biden, and that is a reduction in the tariffs and trade conflict with China that wreaked so much havoc on investor sentiment towards small caps, value, and cyclicals. I talk more about that below.

Going forward, absent another exogenous shock, I think the reopening trade is sustainable and the historic imbalances in Value/Growth and Small/Large performance ratios will continue to gradually revert and market leadership broadens, which is good for the long-term health of the market. The reined-in economy with its pent-up demand is ready to bust the gates, bolstered by virtually unlimited global liquidity and massive pro-cyclical fiscal and monetary stimulus here at home (with no end in sight), as well as low interest rates (aided by the Fed’s de facto yield curve control), low tax rates, rising inflation (but likely below central bank targets), and the innovation, disruption, and productivity gains of rapidly advancing technologies. And although the major cap-weighted indexes (led by mega-cap Tech names) have already largely priced this in, there is reason to believe that earnings estimates are on the low side for 2021 and stocks have more room to run to the upside. Moreover, I expect active selection, strategic beta ETFs, and equal weighting will outperform.

On that note, Sabrient has been pitching to some prominent ETF issuers a variety of rules-based, strategic-beta indexes based on various combinations of our seven core quantitative models, along with compelling backtest simulations. If you would like more information, please feel free to send me an email.

As a reminder, we enhanced our growth-at-a-reasonable-price (aka GARP) quantitative model just about 12 months ago (starting with the December 2019 Baker’s Dozen), and so our newer Baker’s Dozen portfolios reflect better balance between secular and cyclical growth and across large/mid/small market caps, with markedly improved performance relative to the benchmark S&P 500, even with this year’s continued market bifurcation between Growth/Value factors and Large/Small caps. But at the same time, they are also positioned for increased market breadth as well as an ongoing rotation to value, cyclicals, and small caps. So, in my humble opinion, this provides solid justification for an investor to take a fresh look at Sabrient’s portfolios today.

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 (although not without bouts of volatility), the sector rankings reflect a moderately bullish bias (as the corporate outlook is gaining visibility), the technical picture looks solid, and our sector rotation model is in a bullish posture. In other words, we believe “the stars are aligned” for additional upside in the US stock market – as well as in emerging markets and alternatives (including hard assets, gold, and cryptocurrencies).

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

Scott Martindale  by Scott Martindale
  President & CEO, Sabrient Systems LLC

Well, the election is finally upon us, and most folks on either side of the aisle seem to think that the stakes couldn’t be higher. That might be true. But for the stock market, I think removing the uncertainty will send stocks higher in a “relief rally” no matter who wins, as additional COVID stimulus, an infrastructure spending bill, and better corporate planning visibility are just a few of the slam-dunk catalysts. Either way, Modern Monetary Theory (MMT) is here, as both sides seem to agree that the only way to prevent a COVID-induced depression in a highly indebted economy is to print even more money and become even more leveraged and indebted. Now investors can only anxiously pray for a clean, uncontested election, followed soon by a reopening of schools and businesses. Stocks surely would soar.

Of course, certain industries might be favored over others depending upon the party in power, but in general I expect greater market breadth and higher prices into year-end and into the New Year. However, last week, given the absence of a COVID vaccine and additional fiscal stimulus plus the resurgence of COVID-19 in the US and Europe, not to mention worries of a contested election that ends up in the courts, stocks fell as investors took chips off the table and raised cash to ride out the volatility and prepare for the next buying opportunity. The CBOE Volatility Index (VIX) even spiked above 41 last week and closed Friday at 38, which is in panic territory (although far below the all-time high of 85.47 in March).

Nevertheless, even as the market indices fell (primarily due to profit-taking among the bigger growth names that had run so high), many of the neglected value stocks have held up pretty well. And lest you forget, global liquidity is abundant and continuing to rise (no matter who wins the election) – and searching for higher returns than ultra-low (or even negative) government and sovereign debt obligations are yielding.

All in all, this year has been a bit deceiving. While the growth-oriented, cap-weighted indexes have been in a strong bull market thanks to a handful of mega-cap Tech names, the broader market essentially has been in a downtrend since mid-2018, making it very difficult for any valuation-oriented portfolio or equal-weight index to keep up. However, since mid-July (and especially since the September lows) we have seen signs of a nascent rotation into value/cyclicals/small caps, which is a bullish sign of a healthy market. Institutional buyers are back, and they are buying the higher-quality stocks, encouraged by solid Q3 earnings reports.

Going forward, our expectation is that the historic imbalances in Value/Growth and Small/Large performance ratios will continue to gradually revert and market leadership will broaden such that strategic beta ETFs, active selection, and equal weighting will thrive once again. This should be favorable for value, quality, and growth at a reasonable price (GARP) strategies like Sabrient’s, although not to the exclusion of the unstoppable secular growth industries. In other words, investors should be positioned for both cyclical and secular growth.

Notably, Sabrient has enhanced its GARP strategy by adding our new Growth Quality Rank (GQR), which rewards companies with more consistent and reliable earnings growth, putting secular-growth stocks on more competitive footing in the rankings with cyclical growth (even though their forward valuations are often higher than our GARP model previously rewarded). As a result, our newer Baker’s Dozen portfolios launched since December 2019 reflect better balance between secular growth and cyclical/value stocks and across large/mid/small market caps. And those portfolios have shown markedly improved performance relative to the benchmark, even with this year’s continued bifurcation. Names like Adobe (ADBE), Autodesk (ADSK), Digital Turbine (APPS), Amazon (AMZN), Charter Communications (CHTR), NVIDIA (NVDA), and SolarEdge Technologies (SEDG) became eligible with the addition of GQR, and they have been top performers. But at the same time, our portfolios are also well-positioned for a broadening or rotation to value, cyclicals, and small caps. In addition, our three Small Cap Growth portfolios that have launched during 2020 using the same enhanced selection process are all nicely outperforming their benchmark. So, IMHO, this provides solid justification for an investor to take a fresh look at Sabrient’s portfolios today.

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 rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. In summary, I expect stocks to move higher once the election results are finalized – but with plenty of volatility along the way until the economy is fully unleashed from its COVID shackles. In addition, our sector rankings reflect a moderately bullish bias (as the corporate outlook is starting to clear up), the technical picture looks ready for at least a modest bullish bounce from last week’s profit-taking, and our sector rotation model retains its neutral posture. As a reminder, you can go to http://bakersdozen.sabrient.com/bakers-dozen-marketing-materials to find my latest Baker’s Dozen slide deck and commentary on terminating portfolios. Read on....

Scott Martindale  by Scott Martindale
  President & CEO, Sabrient Systems LLC

The April-August 5-month stretch was the best 5-month period for the S&P 500 (+35%) since 1938. The index was +6.3% higher than its pre-COVID high on 2/19/20 and +56.2% higher than its COVID selloff low on 3/23/20. But any market technician would tell you that the further the market rises without a pause, the more severe the inevitable pullback. And indeed, along came the traditionally challenging month of September and a nasty bout of profit-taking mixed with capital preservation – and exacerbated by the standoff on new fiscal stimulus, an uptick in COVID cases hindering global economic reopening, and the potential for a SCOTUS nomination firestorm. Many of the investor darlings from among the disruptive, secular-growth Technology companies that had been surging so strongly have suddenly fallen hard, with the S&P 500 (SPY) pulling back -10.3% from its 9/2/20 intraday high to its 9/21/20 intraday low and the tech-laden Nasdaq 100 (QQQ) falling -14.3%.

After giving back all of August’s strong gains, perhaps Monday was the capitulation day from which the market can recover anew. Q3 earnings reporting season starts in a couple of weeks, so it will be important to get a read on the trajectory of earnings recovery and forward guidance.

I have written often about the stark market bifurcation that has developed over the past few years, beginning with the unwinding of the “Trump Bump” reflation trade in light of the emerging trade wars. It led to historic extremes in Growth over Value and Large over Small caps, with the broad-market, cap-weighted indexes hitting new highs as investment capital has favored mega-cap, secular-growth Tech and passive, market-cap-weighted ETFs. But today, although I think it is unlikely that investors are giving up on Technology names, their high relative valuations as the economy enters what I see as an early-stage expansionary cycle appear to be opening the door for greater market breadth and some capital rotation into value, cyclicals, and smaller caps.

My expectation is that, as the historic imbalances in Value/Growth and Small/Large performance ratios gradually revert and market leadership broadens, strategic beta ETFs, active selection, and equal weighting should thrive once again. This should be favorable for value, growth-at-a-reasonable-price (GARP), and quality-oriented strategies like Sabrient’s, although not to the exclusion of secular growth industries. In other words, an investor should be positioned for both cyclical and secular growth.

This is why, rather than continuing to wait around for the value/growth performance gap to converge, we chose to introduce new enhancements to our GARP stock selection process to better balance value-oriented cyclical growers with consistent secular growers while also reducing relative volatility versus the benchmark. Moreover, we have leveraged our full suite of 7 core quantitative models to create 11 new strategic-beta, passive indexes. You will be hearing more about these in the near future.

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 rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. In summary, while I still have a favorable long-term view on stocks, there will be plenty of volatility ahead. In addition, our sector rankings have a moderately defensive bias (given that the near-term outlook in our fundamentals-based model is muddled and the Outlook scores are tightly bunched), the technical picture looks might be setting up for a bullish reversal, and our sector rotation model sits in a neutral posture. 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.

Read on....

Scott Martindale  by Scott Martindale
  President & CEO, Sabrient Systems LLC

Quick assessment:  We have an historic pandemic wreaking havoc upon the global economy, with many US states reversing their reopenings. We just got the worst ever quarterly GDP growth number, and jobless claims are resurging. The Federal Reserve is frantically printing money at breakneck pace to keep our government solvent, with M3 money supply growth having gone parabolic. We have a highly contentious presidential election that many consider to be the most consequential of our lifetimes. There is unyielding and unappeasable social unrest, with nightly rioting in the streets in many of our major cities. Tensions with China are again on the rise, with a new Cold War seemingly at hand. Hurricanes are threatening severe damage in states that are already reeling from a surge in COVID hospitalizations. And yet the Nasdaq 100 (QQQ) has burst out to new highs while the S&P 500 (SPY) is within 3% of its all-time high (although, quite notably, both of these cap-weighted indexes are dominated by a handful of mega-cap, disruptive juggernauts).

Of course, stocks have been bolstered by unprecedented congressional fiscal programs and Fed monetary support, including zero interest rate policy (ZIRP), open-ended quantitative easing (QE), de facto yield curve control (YCC), and the buying of corporate bonds (including junk bonds and fixed-income ETFs – and perhaps will include equity ETFs at some point). This de facto “Fed put” has induced a speculative fervor, FOMO (“fear of missing out”), and a TINA (“There is No Alternative!”) mindset for risk assets – particularly given infinitesimal bond yields and a falling dollar. Furthermore, while COVID cases have risen with the economy’s attempt at reopening, the death rate is down 75% since its peak in April, as the people being infected this time around are generally younger and less vulnerable and hospitals are better prepared.

However, we have witnessed extreme bifurcation in this market, with certain secular growth segments performing extremely well and hitting new all-time highs, while other segments are quite literally in a depression. And although the pandemic has exacerbated this situation, it has been developing for a while. As I have often discussed, when the trade war with China escalated in mid-2018, the market became highly bifurcated to seek the perceived safety of the dominant mega caps over smaller caps, growth over value, and secular growth Technology over the neglected cyclical growth sectors like Financials, Industrials, Materials, and Energy. It rotated defensive and risk-off even given the positive economic outlook. This is also when the price of gold began to ascend. Yes, gold has become much more than just a hedge; it now has its own secular growth story (as discussed below), which is why Sabrient’s new Baker’s Dozen for Q3 2020 includes a gold miner.

So, while Sabrient’s flagship Baker’s Dozen portfolios over the past two years have been dominated by smaller caps, the value factor, and cyclical sectors – to their detriment in this highly bifurcated market – you can see that our newer portfolios since the enhancements were implemented have been much more balanced among large, mid, and small caps, with a slight growth bias over value, and a balance between secular growth and cyclical growth companies.

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 remains bullish.

As a reminder, Sabrient has introduced process enhancements to our 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 companies (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. To read on, click here....