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

Another positive month for the major indexes, despite plenty of new bricks in the proverbial Wall of Worry. That makes 7 months in a row – the longest streak in over 30 years – and 14 of the past 17 months (since the pandemic low). From a technical (chart) perspective, the S&P 500 has tested its 50-day simple moving average seven times this year, each time going on to hit a new high. And it’s not just the cap-weighted index (SPY) as the equal-weight version (RSP) has been moving in lockstep, illustrating good market breadth and confirming market conviction. Stocks seem to have already priced in some modest tapering of asset purchases by year end, so in the wake of Fed chairman Powell’s late-August speech in Jackson Hole indicating no plans for rate hikes, stocks surged yet again. Indeed, it has become a parabolic “melt-up,” which of course cannot go on forever.

Many investors have been patiently awaiting a significant market correction to use as a buying opportunity, but it remains elusive. What happened to the typical August low-volume technical correction? The big money institutions and hedge funds certainly have stuck to the script by reducing equity exposure and increasing exposure to volatility. But retail investors didn’t get the memo as every time it appears the correction has begun, they treat it like a buyable dip – not just in meme stocks but also the disruptive, secular-growth Tech stocks that so dominate total market cap and the cap-weighted, broad-market indexes. It seems like yet another market distortion caused by government intervention and de facto Modern Monetary Theory (MMT) that has flooded the economy with free money and kept workers at home to troll on social media, gamble on DraftKings, and speculate in Dogecoin, NFTs, SPACs, and meme stocks.

Will September finally bring a significant (and overdue) correction, or will the dip buyers, led by an active, brash, and risk-loving retail investor, continue to scare off the short sellers and prop up the market? Is this week’s pullback yet another head fake? And regardless, will the S&P 500 (both cap-weight and equal-weight) finish the year higher than last week’s all-time highs?

There is little doubt in my mind that the big institutional investors continue to wait patiently in the tall grass like a cheetah to pounce on any significant market weakness, like a 10+% selloff. Valuations are dependent on earnings, interest rates, and the equity risk premium (ERP, i.e., earnings yield minus the risk-free rate), and today we have robust corporate earnings, rising forward guidance, persistently low interest rates, a dovish Fed, and a low ERP – which is related to inflation expectations that are much lower than recent CPI readings would have you expect. I continue to expect inflation to moderate in 2022 while interest rates remain constrained by a stable dollar and Treasury demand. The Fed’s ongoing asset purchases (despite some expected tapering) along with robust demand among global investors (due to global QE and low comparative yields) has put a bid under bonds and kept nominal long term yields low (albeit with negative real yields). Indeed, bond yields today are less sensitive to inflationary signals compared to the past.

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 SectorCast rankings reflect a solidly bullish bias; the technical picture has been strong but remains in dire need of significant (but healthy and buyable, in my view) correction; and our sector rotation model retains its bullish posture. We continue to believe in having a balance between value/cyclicals and secular growth stocks and across market caps, although defensive investors may prefer an overweight on large-cap, secular-growth Tech and high-quality dividend payers.

As a reminder, we post my latest presentation slide deck and Baker’s Dozen commentary on our public website.) Sabrient’s newer portfolios – including Q3 2021 Baker’s Dozen, Small Cap Growth, Dividend, and Forward Looking Value– all reflect the process enhancements that we implemented in December 2019 in response to the unprecedented market distortions that created historic Value/Growth and Small/Large performance divergences. With a better balance between cyclical and secular growth and across market caps, most of our newer portfolios once again have shown solid performance relative to the benchmark during quite a range of evolving market conditions.

By the way, I welcome your comments, feedback, or just a friendly hello!  Read on….

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

As earnings season gets going, I believe we will see impressive reports reflecting stunning YOY growth in both top and bottom lines. According to Bloomberg, sell-side analysts' consensus YOY EPS growth estimate for the S&P 500 is north of 63% for Q2, 36% for full-year 2021, and 12% for 2022. But I still consider this to be somewhat conservative, with plenty of upside surprises likely. However, the market’s reaction to each earnings release will be more predicated on forward guidance, as investors are always forward-looking. To me, this is the bigger risk, but I am optimistic. Today’s lofty valuations are pricing in the expectation of both current “beats” and raised guidance, so as the speculative phase of the recovery moves into a more rational expansionary phase, I expect some multiple contraction such that further share price appreciation will depend upon companies “growing into” their valuations rather than through further multiple expansion, i.e., the earnings growth rate (through revenue growth, cost reduction, and rising productivity) will need to outpace the share price growth rate.

Despite the lofty valuations, investors seem to be betting on another blow-out quarter for earnings reports, along with increased forward guidance. On a technical basis, the market seems to be extended, with unfilled “gaps” on the chart. But while small caps, value stocks, cyclical sectors, and equal-weight indexes have pulled back significantly and consolidated gains since early June, the major indexes like S&P 500 and Nasdaq that are dominated by the mega caps haven’t wanted to correct very much. This appears to reinforce the notion that investors today see these juggernaut companies as defensive “safe havens.” So, while “reflation trade” market segments and the broader market in general have taken a 6-week risk-off breather from their torrid run and pulled back, Treasuries have caught a bid and the cap-weighted indexes have hit new highs as the big secular-growth mega-caps have been treated as a place to park money for relatively safe returns.

It also should be noted that the stock market has gone quite a long time without a significant correction, and I think such a correction could be in the cards at some point soon, perhaps to as low as 4,000 on the S&P 500, where there are some unfilled bullish gaps (at 4,020 and 3,973). However, if it happens, I would look at it as a long-term buying opportunity – and perhaps mark official transition to a stock-picker’s market.

The past several years created historic divergences in Value/Growth and Small/Large performance ratios with narrow market leadership. But after a COVID-selloff recovery rally, fueled by a $13.5 trillion increase in US household wealth in 2020 (compared to an $8.0 trillion decrease in 2008 during the Financial Crisis), that pushed abundant cheap capital into speculative market segments, SPACs, altcoins, NFTs, meme stocks, and other high-risk investments (or “mal-investments”), it appears that the divergences are converging, leadership is broadening, and Quality is ready for a comeback. A scary correction might be just the catalyst for the Quality factor to reassert itself. It also should allow for active selection, strategic beta, and equal weighting to thrive once again over the passive, cap-weighted indexes, which also would favor the cyclical sectors (Financial, Industrial, Materials, Energy) and high-quality dividend payers (e.g., “Dividend Aristocrats”). But I wouldn’t dismiss secular-growth Technology names that still sport relatively attractive valuations (Note: the new Q3 2021 Baker’s Dozen includes four such names).

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 sector rankings reflect a solidly bullish bias; the technicals picture has been strong for the cap-weighted major indexes but is looking like it is setting up for a significant (but buyable) correction; and our sector rotation model retains its bullish posture.

As a reminder, Sabrient’s newer portfolios – including Small Cap Growth, Dividend, Forward Looking Value (launched on 7/7/21), and the upcoming Q3 2021 Baker’s Dozen (launches on 7/20/21) – all reflect the process enhancements that we implemented in December 2019 in response to the unprecedented market distortions that created historic Value/Growth and Small/Large performance divergences. With a better balance between cyclical and secular growth and across market caps, most of our newer portfolios once again have shown solid performance relative to the benchmark (with some substantially outperforming) during quite a range of evolving market conditions. (Note: we post my latest presentation slide deck and Baker’s Dozen commentary on our public website.)  Read on….

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

Stocks are once again challenging all-time highs as the forward earnings estimates are being raised at an historically high rate in the wake of another impressive earnings season that blew away all consensus expectations. YTD through May, index total returns were strong across the board, including +12.7% for S&P 500, +6.6% for Nasdaq 100 (as mega-cap growth endured the brunt of the Value rotation), and +15.2% for Russell 2000 small caps. The strong earnings reports have given rise to further upgrades to forward sales and earnings from a highly cautious analyst community, many of whom are still concerned about COVID variants, supply chains, inflation, and Fed tapering, among many other worries.

Nevertheless, share prices have not gone up as fast as earnings, so valuations have receded a bit, with the S&P 500 falling from a forward P/E of 21.8x at the start of the year to 21.2x at the end of May (i.e., -2.8% versus a total return of +12.7%). Cyclicals in particular have seen this same trend, since they were largely bid up on speculation. For example, Energy (XLE) is up +39.2% YTD, but its forward P/E has fallen from 29.2x to 17.2x (-28.4%). With plenty of cash on the sidelines, many investors likely are holding back and hoping for a solid pullback rather than deploy cash at what may still appear to be elevated valuations and stretched technicals, as they move past a speculative investing mindset and into a more fundamentals and quality-oriented stage. While more speculative asset classes like SPACs and cryptocurrencies already have endured a pretty severe correction (driven by negative press or tweets from influential personalities), stocks really haven’t yet seen a healthy cleansing.

When the April YOY CPI reading came out on 5/12 at a surprisingly high +4.2%, stocks were expected to selloff hard, led by mega-cap growth stocks. But instead, they quickly gathered conviction and resumed their march higher. Small-cap value (which is dominated by cyclical sectors like Financial, Industrial, Materials, and Consumer Discretionary) in particular remains quite strong this year as the Value rotation continues in the face of an expansionary/recovery economic phase, unabated government support and largesse, and a continued productivity boom. And with GDP growth accelerating, particularly as the economy fully reopens and hobbled global supply chains are mended or rerouted, it is likely that the Street’s forward earnings estimates (even after the recent upgrades) are still too low, which means stocks should have more room to run without relying upon multiple expansion, in my view.

So, two questions seem to linger on everyone’s mind: 1) how might inflationary pressures impact economic growth and the stock market, and 2) are stock valuations overdone and at risk of a major correction? I tackle these questions in today’s post. In short, I believe earnings momentum should win out over overblown inflation worries and multiple contraction as we embark upon a multi-year boom (a “Roaring ‘20s” redux?) – but not without bouts of volatility.

With no clear path for runaway inflation and given the recent rotation out of the Growth factor, investors now seem to be adding exposure to both secular and cyclical growth – which is what my regular readers know I have been suggesting and what Sabrient’s GARP portfolios reflect (including our flagship Baker’s Dozen). As a reminder, you can go to http://bakersdozen.sabrient.com/bakers-dozen-marketing-materials to find my latest presentation slide deck and market commentary (which includes an update on the Q2 2020 Baker’s Dozen portfolio and an overview of the latest Q2 2021 Baker’s Dozen).

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 sector rankings reflect a solidly bullish bias, the technical picture is still long-term bullish (although in need of further near-term consolidation), and our sector rotation model retains its bullish posture. Read on….

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

After a strong Q1, stocks continue to rise on exuberant optimism, and the mega-cap dominated S&P 500 and Nasdaq 100 just hit new highs this week. Notably, the Tech sector significantly lagged the broader market during the second half of Q1, primarily due to worries about the apparent spike in inflation and a surge in the 10-year Treasury yield (as a higher discount rate on future earnings has greater implications for longer duration growth stocks). But once the rapid rise in yield leveled off, Tech caught a bid once again. The Russell 2000 small cap index, after absolutely crushing all others from November through mid-March, has been cooling its jets for the past several weeks. I think the other indexes will need to do the same. In the short term, after going straight up over the past two weeks, the S&P 500 and Nasdaq 100 both look like they need to pause for some technical consolidation, but longer term look pretty darn good for solid upside – so long as earnings reports surprise solidly higher than the already strong predictions, and Q1 earnings season is now at hand.

Regular readers know I have been opining extensively about the bullish convergence of positive events including rapid vaccine rollout, reopening of the economy, massive fiscal and monetary stimulus/support, infrastructure spending, pent-up demand, strong revenue and earnings growth, and the start of a powerful and sustained recovery/expansionary economic phase – but with only a gradual rise in inflation and interest rates – in contrast with those who see the recent surge in inflation metrics and interest rates as the start of a continued escalation and perhaps impending disaster. Notably, in his annual letter to shareholders, JPMorgan CEO Jamie Dimon laid out a similar vision, referring to it as a “Goldilocks moment” leading to an economic boom that “could easily run into 2023.”

In my view, it was normal (and healthy) to see record low interest rates last summer given the economic shutdowns, and as the economy begins to reopen, interest rates are simply returning to pre-pandemic levels. Furthermore, relatively higher yields in the US attract global capital, and the Fed continues to pledge its support – indeed, I think it may even implement yield curve control (YCC) to help keep longer-term rates in check.

And as for inflation, the March CPI reading of 2.6% YOY sounds ominous, but it is mostly due to a low base period, i.e., falling prices at the depth of the pandemic selloff in March 2020, and this dynamic surely will continue over the coming months. Although we see pockets of inflation where there are production bottlenecks (e.g., from shutdowns or disrupted supply chains), it seems that massive stimulus has created asset inflation but little impact on aggregate demand and consumer prices, as personal savings rates remain high and the recent stimulus programs have mainly gone to paying bills, putting people back to work, and building up personal investment accounts. Future spending bills targeting infrastructure or green energy might have a greater impact, but for now, the huge supply of money in circulation is largely offset by disinflationary drivers like low velocity of money, aging demographics, re-globalization of trade and supply chains, and technological disruption. The Treasury market seems to be acknowledging this, as the rapid rise in the 10-year yield has leveled off at around 1.7%.

Thus, I believe that growth stocks, and in particular the Technology sector, must remain a part of every portfolio, even in this nascent expansionary economic phase that should be highly favorable to value and cyclical sectors like Industrial, Financial, Materials, and Energy. Put simply, new technologies from these Tech companies can facilitate other companies from all sectors to be more efficient, productive, and competitive. However, investors must be selective with those secular growth favorites that sport high P/E multiples as they likely will need to “grow into” their current valuations through old-fashioned earnings growth rather than through further multiple expansion, which may limit their upside.

And with Sabrient’s enhanced selection process, we believe our portfolios – including the Q1 2021 Baker’s Dozen that launched on 1/20/21, Small Cap Growth portfolio that launched on 3/15/21, Sabrient Dividend portfolio that launched on 3/19/21, and the upcoming Q2 2021 Baker’s Dozen that launches next week on 4/20/21 – are positioned for any growth scenario.

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 (but with occasional bouts of volatility), our sector rankings reflect a solidly bullish bias, the technical picture is still long-term bullish (although in need of some near-term consolidation), and our sector rotation model retains its bullish posture.  Read on….

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

Investors have endured some unnerving gyrations in the stock market the past couple of weeks. Although the S&P 500 has fully recovered to achieve a new record high on Thursday at 3,960, the formerly high-flying Nasdaq is still 5% below its recent high. The CBOE Volatility Index (VIX) has managed to remain below the 30 handle throughout the turbulence, where it has held since the end-of-January pullback. I have been saying regularly that I am bullish on equities but also expect to see occasional bouts of volatility, and this latest bout was driven by a sudden spike in Treasury yields (to above 1.6% on the 10-year!) due to tepid investor interest in the Treasury auctions and new inflation worries. However, Wednesday’s 10-year auction went just fine, boosting investor comfort. Obviously, a rapid rise in interest rates would wreak havoc on a heavily leveraged US economy, and it would hurt equity valuations versus bonds – especially long-duration growth stocks, which is why the high-flying Tech stocks have borne the brunt of the damage.

Nevertheless, optimism reigns given the explosive combination of rapid vaccine rollout, falling infection rates, new therapeutics (like monoclonal antibodies bamlanivimab and etesevimab), accelerated reopening of the economy, and the massive new fiscal stimulus package, coupled with the Fed’s promise not to tighten – in fact, the Fed may implement yield curve control (YCC) to balance its desire for rising inflation with limits on debt service costs. I see the recent pullback (or “correction” for the Nasdaq Composite) as exactly the sort of healthy wringing-out of speculative fervor that investors wish for (as a new buying opportunity) – but then often are afraid to act upon.

The “reflation trade” (in anticipation of higher real interest rates and inflation during an expansionary economic phase) would suggest overweighting cyclical sectors (Materials, Energy, Industrials, and Financials), small caps, commodities, emerging markets, and TIPS, as well as some attractively valued Technology and Healthcare stocks that offer disruptive technologies and strong growth trends. But investors must be more selective among the high-fliers that sport high P/E multiples as they likely will need to “grow into” their current valuations through old-fashioned earnings growth rather than through further multiple expansion, which may limit their upside. In addition, I think it is prudent to hedge against negative real interest rates and dollar devaluation by holding gold, gold miners, and cryptocurrencies. I elaborate on this below.

Regardless, with Sabrient’s enhanced stock selection process, we believe our portfolios – including the current Q1 2021 Baker’s Dozen that launched on 1/20/21, Small Cap Growth portfolio that launches on 3/15/21, Sabrient Dividend portfolio that launches on 3/19/21, and the Q2 2021 Baker’s Dozen that will launch next month on 4/20/21 – are better positioned for either: (a) continued broadening and rotation into value, cyclicals, and small/mid-caps, or (b) a return to the narrow leadership from secular growth that has been so prevalent for so long.

As a reminder, you can go to http://bakersdozen.sabrient.com/bakers-dozen-marketing-materials to find my latest presentation slide deck and market commentary (which includes an update on the Q1 2020 Baker’s Dozen portfolio that terminates next month), as well as a “talking points” sheet that describes each of the 13 stocks in the newest Q1 2021 portfolio.

I am particularly excited about our new portfolios 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 – combined with a few stellar individual performers – has indeed provided significantly improved performance relative to the benchmark (as I discussed in my January article).

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 (but with occasional bouts of volatility, as we have been experiencing), our sector rankings reflect a solidly bullish bias, the technical picture is mixed (neutral to bullish near-term and long-term, but bearish mid-term), and our sector rotation model retains its bullish posture. Read on….

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

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-materialsRead on....

  Scott Martindaleby Scott Martindale
  President & CEO, Sabrient Systems LLC

As COVID-19 quickly moved from outbreak to epidemic to full-fledged pandemic in a matter of weeks, hospitalizations and deaths gained momentum, as did the panic selling of risk assets. It demonstrates how interconnected the world has become. The pandemic has become a generational crisis – and the very definition of the proverbial Black Swan event – bringing the global economy to its knees, at least temporarily. As a result, Q1 closed with a rare and dreaded trifecta of three down months, which historically does not lead to a quick recovery (albeit with a small sample size). It was the worst Q1 performance since 1987 and the fastest fall from record highs in history.

From its intraday all-time high on 2/19/20 to the intraday low on 3/23/20 (i.e., a little over one month), the S&P 500 fell an incredible -35.3%, wiping out the entire “Trump Bump” and about $10 trillion in US market cap in almost the blink of an eye. Moreover, asset classes were highly correlated in a mass liquidation, leaving no place to hide other than US Treasuries or cash (thus strengthening the US dollar). Even gold and cryptocurrencies largely failed to serve as the safe havens from financial distress they are intended to be, at least initially, as traders liquidated everything into cold hard cash. Indeed, money market funds surged above $4 trillion for the first time ever. Never truer was the old saying, “Stocks take the stairs up and the elevator down” – or perhaps more fittingly in this case, stocks had rock-climbed up the cliff and swan-dived back down.

But the news has gotten better, as social distancing seems to be doing its job to “flatten the curve” of new hospitalizations, while the Federal Reserve and Congress have flooded the economy with unprecedented levels of fiscal and monetary support, stimulus, and liquidity. As a result, the S&P 500 has retraced over half of the selloff, and just posted its best week in 46 years (+12.1% in a shortened holiday week, at that). Now, the big question on everyone’s mind is, “What’s next?” Some see this as the end to a very brief bear market and the start of a brand new bull market, while others see it as just a bear market bounce and an opportunity to sell into strength before the next downswing. Some prominent names even think we are the verge of the next Great Depression. But from my standpoint, as we enter Passover and Easter weekend, I am optimistic that mass liquidation of financial assets is likely behind us, the economy will reopen sooner than previously expected, and that we have seen the market lows (although there may be some backfilling of technical gaps and retesting of support levels).

Perhaps a resumption of last fall’s fledgling broad-based rally (8/27/19 – 12/20/19) will persist much longer this time and favor the cyclical market segments (as many prominent names on Wall Street expect) and valuation-oriented strategies like Sabrient’s Baker’s Dozen – particularly given our newly-enhanced approach designed to improve all-weather performance and reduce relative volatility versus the benchmark S&P 500 (which has been tough to beat over the past couple of years given the narrow leadership of secular-growth mega-cap Tech and persistently defensive investor sentiment).

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. Notably, Healthcare is suddenly the hero during this COVID-19 scare instead of the avoided sector from all the “Medicare for All” talk. (Perhaps that is behind us now that Bernie Sanders has suspended his presidential campaign.) In summary, our sector rankings remain neutral, and our sector rotation model moved to a defensive posture last month. The technical picture shows a market that has likely bottomed and begun to recover, although with elevated volatility likely to persist and strong directional signals that are suddenly invalidated and reversed by the latest news report on COVID-19 or government stimulus.

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. Click to read on...

  Scott Martindaleby Scott Martindale
  President & CEO, Sabrient Systems LLC

What a week. From its intraday all-time high on 2/19/20 to the intraday low on Friday 2/28/20, the S&P 500 fell -15.8%. It was a rare and proverbial “waterfall decline,” typically associated with a Black Swan event – this time apparently driven primarily by fears that the COVID-19 virus would bring the global economy to its knees. Once cases started popping up across the globe and businesses shuttered their doors, it was clear that no amount of central bank liquidity could help.

But in my view, it wasn’t just the scare of a deadly global pandemic that caused last week’s selloff. Also at play were the increasing dominance of algorithmic trading to exaggerate market moves, as well as the surprising surge in popularity of dustbin Bolshevik Bernie Sanders. I think both lent a hand in sending investors into a tizzy last week.

Even before fears of a pandemic began to proliferate, market internals were showing signs of worry. After a sustained and long-overdue risk-on rotation into the value factor, small-mid caps, and cyclical sectors starting on 8/27/19, which boosted the relative performance of Sabrient’s portfolios, investor sentiment again turned cautious in the New Year, even as the market continued to hit new highs before last week’s historic selloff. It was much the same as the defensive sentiment that dominated for most of the March 2018 — August 2019 timeframe, driven mostly by the escalating China trade war. (It seems like all market swoons these days are related to China!)

Alas, I think we may have seen on Friday a selling climax (or “capitulation”) that should now allow the market to recover going forward. In fact, the market gained back a good chunk of ground in the last 15 minutes of trading on Friday – plus a lot more in the afterhours session – as the extremely oversold technical conditions from panic selling triggered a major reversal, led by institutional and algorithmic traders. That doesn’t mean there won’t be more volatility before prices move higher, but I think we have seen the lows for this episode.

The selloff wasn’t pretty, to be sure, but for those who were too timid to buy back in October, you have been given a second chance at those similar prices, as the forward P/E on the S&P 500 fell from nearly 19.0x to 16.3x in just 7 trading days. Perhaps this time the broad-based rally will persist much longer and favor the risk-on market segments and valuation-oriented strategies like Sabrient’s Baker’s Dozen – particularly given our newly-enhanced approach designed to improve all-weather performance and reduce relative volatility versus the benchmark S&P 500.

In this periodic update, I provide a detailed market commentary (including other factors at play in the market selloff), 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 look neutral, and our sector rotation model moved to a defensive posture when the S&P 500 lost support from its 200-day moving average. The technical picture has moved dramatically from grossly overbought to grossly oversold in a matter of a few days, such that the S&P 500 has developed an extreme gap below its 20-day moving average and the VIX is at an extreme high. Thus, I believe a significant bounce is likely.

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

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