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....

  by Scott Martindale
  President & CEO, Sabrient Systems LLC

  As the New Year gets underway, stocks have continued their impressive march higher. Comparing the start of this year to the start of 2019 reveals some big contrasts. Last January, the market had just started to recover from a nasty 4Q18 selloff of about 20% (a 3-month bear market?), but this time stocks have essentially gone straight up since early October. Last January, we were still in the midst of nasty trade wars with rising tariffs, but now we have a “Phase 1” deal signed with China and the USMCA deal with Mexico and Canada has passed both houses of Congress. At the beginning of last year, the Fed had just softened its hawkish rhetoric on raising rates to being "patient and flexible" and nixing the “autopilot” unwinding of its balance sheet (and in fact we saw three rate cuts), while today the Fed has settled into a neutral stance on rates for the foreseeable future and is expanding its balance sheet once again (to shore up the repo market and finance federal deficit spending (but don’t call it QE, they say!). Last year began in the midst of the longest government shutdown in US history (35 days, 12/22/18–1/25/19), but this year’s budget easily breezed through Congress. And finally, last year began with clear signs of a global slowdown (particularly in manufacturing), ultimately leading to three straight quarters of YOY US earnings contraction (and likely Q4, as well), but today the expectation is that the slowdown has bottomed and there is no recession in sight.

As a result, 2019 started with the S&P 500 displaying a forward P/E ratio of 14.5x, while this year began with a forward P/E of 18.5x – which also happens to be what it was at the start of 2018, when optimism reigned following passage of the tax cuts but before the China trade war got nasty. So, while 2018 endured largely unwarranted P/E contraction that was more reflective of rising interest rates and an impending recession, 2019 enjoyed P/E expansion that essentially accounted for the index’s entire performance (+31% total return). Today, the forward P/E for the S&P 500 is about one full standard deviation above its long-term average, but the price/free cash flow ratio actually is right at its long-term average. Moreover, I think the elevated forward P/E is largely justified in the context of even pricier bond valuations, low interest rates, favorable fiscal policies, the appeal of the US over foreign markets, and supply/demand (given the abundance of global liquidity and the shrinking float of public companies due to buybacks and M&A).

However, I don’t think stocks will be driven much higher by multiple expansion, as investors will want to see rising earnings once again, which will depend upon a revival in corporate capital spending. The analyst consensus according to FactSet is for just under 10% EPS growth this year for the S&P 500, so that might be about all we get in index return without widespread earnings beats and increased guidance, although of course well-selected individual stocks could do much better. Last year was thought to be a great setup for small caps, but alas the trade wars held them back from much of the year, so perhaps this will be the year for small caps. While the S&P 500 forward P/E has already risen to 19.0x as of 1/17, the Russell 2000 small cap index is 17.2x and the S&P 600 is only 16.8x.

Of course, there are still plenty of potential risks out there – such as a China debt meltdown, a US dollar meltdown (due to massive liquidity infusions for the dysfunctional repo market and government deficit spending), a US vote for democratic-socialism and MMT, a military confrontation with Iran, or a reescalation in trade wars – but all seem to be at bay for now.

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, while the technical picture also is quite bullish (although grossly overbought and desperately in need of a pullback or consolidation period), and our sector rotation model retains its bullish posture. Notably, the rally has been quite broad-based and there is a lot of idle cash ready to buy any significant dip.

As a reminder, Sabrient now publishes a new Baker’s Dozen on a quarterly basis, and the Q1 2020 portfolio just launched on January 17. You can find my latest slide deck and Baker’s Dozen commentary at http://bakersdozen.sabrient.com/bakers-dozen-marketing-materials, which provide discussion and graphics on process, performance, and market conditions, as well as the introduction of two new process enhancements to our long-standing GARP (growth at a reasonable price) strategy, including: 1) our new Growth Quality Rank (GQR) as an alpha factor, which our testing suggests will reduce volatility and provide better all-weather performance, and 2) “guardrails” against extreme sector tilts away from the benchmark’s allocations to reduce relative volatility. Read on....

Scott Martindaleby Scott Martindale
President, Sabrient Systems LLC

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

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

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

In this periodic update, I provide a market commentary, offer my technical analysis of the S&P 500, review Sabrient’s latest fundamentals-based SectorCast rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. In summary, our sector rankings still look bullish, while the sector rotation model has returned to a bullish posture as investors position for a robust Q2 earnings season. Read on....

by Scott Martindale
President, Sabrient Systems LLC

After an inspiring final day of Q1 led by the usual “window dressing” of mutual fund managers, news-driven volatility returned with a vengeance on Monday before recovering some ground on Tuesday. Although I rarely trust market moves on the last day of a quarter or the first day of a new quarter, there is little doubt that market volatility is back this year, as I expected it would be. Last year, rather than enduring scary selloffs to correct imbalances, the market simply rotated into neglected market segments from time to time. This conviction to stay invested was largely due to consistent improvement in global economic fundamentals coupled with rising optimism about new fiscal stimulus – leading to a fear of missing out. But given the passage of the tax bill and plenty of progress with deregulation last year, I expected investors this year to display more of a Missourian “show me” attitude as to what Corporate America actually would do with their newfound cash windfalls and looser regulatory noose. Would this truly spell the end of the capex recession, ushering in a new wave of onshoring, PP&E upgrades, hiring, buybacks, and M&A? For their part, sell-side analysts have been raising corporate earnings estimates at a historically fast pace.

But the proof is in the pudding, as they say, and the price run-up and elevated valuation multiples (that arose in anticipation of tax cuts and new corporate investment) were due for compression, as speculation gives way to reality, along with some “price rationalization” and deleveraging of speculative portfolios. And on top of those dynamics, the market is suddenly fretting about tariffs, trade wars, inflationary pressures, and the Fed. Nevertheless, there seems to be something for all investors to hold on to, as both fundamentalists and technicians alike should be excited by the lower valuations and successful tests of support in a climate of robust growth and corporate earnings. But I’m not talking about a return to market conditions of old, characterized by falling interest rates, slow growth, and low volatility, which rewarded passive investing in cap-weighted indexes with elevated P/E’s. Instead, we likely are entering a new era, characterized by rising interest rates, faster growth, and higher volatility, which rewards sound stock-picking.

In this periodic update, I provide a market commentary, offer my technical analysis of the S&P 500, review Sabrient’s latest fundamentals-based SectorCast rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. In summary, our sector rankings still look bullish, while the sector rotation model has fallen into a neutral posture during this period of consolidation and testing of support levels. Read on....

by Scott Martindale
President, Sabrient Systems LLC

Many market commentators have been in a prolonged tizzy, warning of an inevitable selloff to come. And indeed we finally got one, with a huge spike in volatility. A climate of low inflation and structurally low interest rates has meant less discounting of future corporate earnings, which has allowed for higher enterprise values and stock prices. But when inflation fears suddenly popped up, investors feared an imminent repricing of equities at lower multiples. As I wrote at the start of the year, I expected some renewed volatility and compression in valuation multiples to occur during 2018, but I sure didn’t expect it to happen quite so soon. However, I also said that a correction would be healthy, and that it won’t necessarily be as deep of a selloff as so many investors have feared – and I stand by that prediction.

So, what is going on here? I think there were a few catalysts. First, the dollar has been plummeting on inflation worries, chasing away global fixed income investors and spiking yields, which put elevated equity valuations into question. Second, a healthy technical correction from January’s parabolic uptrend in stock prices spiked volatility to such a degree that the inverse VIX ETF/ETNs imploded, revealing structural problems with some of these products that not only spooked institutional investors but also triggered some abrupt changes to tactical equity exposures in their algorithmic trading models. And then we heard some FOMC members making statements implying that perhaps there is no longer a “Fed Put” supporting the market. It’s no wonder the long-expected correction finally (and quite suddenly) came about.

Given that the price chart had gone parabolic, it shouldn’t be too much of a surprise that volatility raised its ugly head, with the CBOE Market Volatility Index (VIX) briefly spiking above 50, much like an overstretched rubber band snaps back, and with sector correlations rising sharply. Nevertheless, I still expect solidly positive performance in the broad market indices by year end, although significantly lower than last year’s +22% performance on the S&P 500, and perhaps only in the high single digits. I also believe that heightened volatility and some compression in the broad market valuation multiples will lead to greater market breadth and lower sector correlations as investors pick their spots outside of the mega-caps (or passive index investing) and seek out higher returns in stocks that display strong growth prospects at a reasonable price (i.e., GARP) – with realistic potential for gains in the 15-25% range (or even higher).

In this periodic update, I provide a market commentary, offer my technical analysis of the S&P 500, review Sabrient’s latest fundamentals-based SectorCast rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. In summary, our sector rankings still look bullish, while the sector rotation model moved to a neutral bias in response to the market turbulence. Read on....

Scott Martindaleby Scott Martindale
President, Sabrient Systems LLC

Stocks have pushed to new highs yet again, given more positive signs of rising global GDP, strong economic reports here at home, another quarter of solid corporate earnings reports (especially those amazing mega-cap Tech companies), and an ever-improving outlook for passage of a tax reform bill. Likewise, inflows into U.S.-listed exchange-traded funds continued to reach heights never before seen, with the total AUM in the three primary S&P 500 ETFs offered by the three biggest issuers BlackRock, Vanguard, and State Street (IVV, VOO, SPY) having pushed above $750 billion. On the other hand, discussion on Monday of a potential “phase-in” period for lowering tax rates has had some adverse impact on small caps this week, given that they would stand to benefit the most.

Nevertheless, I still see a healthy broadening of the market in process, with expectation of some rotation out of the mega-cap Tech leaders (despite their incredible surge last Friday) and into attractively-valued mid and small caps. But that dynamic has suddenly taken a backseat (once again) to those amazingly disruptive Tech juggernauts, who simply refuse to give up the limelight. Turns out, elevated valuations, unsustainable momentum, and the “law of large numbers” (hindering their extraordinary growth rates) don’t seem to apply to these companies, at least not quite yet. Their ability to disrupt, innovate, take existing market share, and create new demand seems to know no bounds, with infinite possibilities ahead for the Internet of Things (IoT), artificial intelligence (AI), machine learning, Big Data, virtual reality, cloud computing, ecommerce, mobile apps, 5G wireless, smart cars, smart homes, driverless transportation, and so on….

Still, the awe-inspiring performance and possibilities of these mega-cap Techs notwithstanding, longer term I remain positive on mid and small caps. Keep in mind, in many cases the growth opportunities of these up-and-comers are largely tied to supplying the voracious appetites of the mega-caps. So, it is a way to leverage the continued good fortunes of the big guys, who eventually will have to pass the baton to other market segments that display more attractive forward valuation multiples.

In this periodic update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review Sabrient’s latest fundamentals-based SectorCast rankings of the ten US business sectors, and then offer up some actionable ETF trading ideas. In summary, our sector rankings still look bullish, while the sector rotation model also maintains its bullish bias. A steady and improving global growth outlook continues to foster low volatility and an appetite for risk assets, while low interest rates should persist. Notably, BlackRock recently posted a market outlook with the view that the US economic growth cycle may continue for years to come, and I agree – so long as the worldwide credit bubble doesn’t suddenly spring a leak and upset the global economic applecart. Read on....

Scott MartindaleBy Scott Martindale
President, Sabrient Systems LLC

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

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

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

In this periodic update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review Sabrient’s latest fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable ETF trading ideas. In summary, our sector rankings still look bullish, while the sector rotation model also maintains its bullish bias, and the overall climate continues to look favorable for risk assets like equities. Although October historically has been a month that can bring a shock to the market, it also is on average one of the strongest months for stocks, and of course Q4 is seasonally a bullish period. Read on...

Scott MartindaleBy Scott Martindale
President, Sabrient Systems LLC

As expected, August brought more volatility. Early in the month, the large cap, mid cap, and small cap indices all set new all-time closing highs while the CBOE Volatility Index (VIX) hit an all-time low. But then tough resistance levels failed to yield, the expected late-summer volatility set in, and support levels were tested. Nevertheless, the intra-month swoon (3% on the S&P 500) turned into a buying opportunity for the bulls, and by month-end the S&P 500 managed to eke out a small gain, giving it five straight positive months. Then the market started the month of September with a particularly strong day to put those all-time highs once again within spittin’ distance…that is, until North Korea detonated a hydrogen bomb in its testing area, while massive hurricanes created havoc. But by this past Friday, bulls had recovered key support levels.

One can only wonder how strong our global economy would be if it weren’t for all the tin-pot dictators, jihadis, and cyberhackers that make us divert so much of our resources and attention. Nevertheless, prospects for the balance of 2H2017 still look good, even though solid economics and earnings reports have been countered by government dysfunction, catastrophic storms, escalating global dangers, and plenty of pessimistic talk about market conditions, valuations, and credit bubbles. Thus, while equities continue to meander higher on the backs of some mega-cap Tech sector darlings and cautious optimism among some investors, Treasuries are also rising (and yields falling) to levels not seen since before the election in a flight to safety among other investors.

In this periodic update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review Sabrient’s weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable ETF trading ideas. In summary, although September historically has been the weakest month of the year, our sector rankings still look moderately bullish, while the sector rotation model has managed to maintain its bullish bias, and overall the climate still seems favorable for risk assets like equities. Read on....

Scott MartindaleBy Scott Martindale
President, Sabrient Systems LLC

July lived up to its history as a typically solid month for stocks, and 2H2017 is off to a strong start. Technology and Healthcare sectors continue to be the year-to-date leaders, and lately Utilities has gotten into the act on an income play as interest rates stay low. Large cap, mid cap, and small cap indices all continue to set all-time closing highs, while the CBOE Volatility Index (VIX) hit an all-time low last week. The 22,000 level on the Dow was just surpassed on a closing basis on Wednesday, and the 2,500 level on the S&P 500 beckons. Nasdaq has now shown positive performance in 11 of the past 13 months, so a little retrenchment is no surprise – if for no other reason but to take a breather and let other market segments play catch-up.

Although there are of course worrisome issues everywhere you look, the good news is that the global economy is strengthening, the Fed and other central banks are taking pains not to screw things up on their paths to “normalization,” and as a successful Q2 earnings season winds down, a weaker dollar should lead to a better Q3 than is currently forecasted. So, I would say that on balance, things continue to look encouraging. But as valuations in the mega caps (e.g., FAAMG) continue to rise, it finally may be time for small caps to seize the baton and start to outperform.

In this periodic update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review Sabrient’s weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable ETF trading ideas. In summary, our sector rankings still look bullish, while the sector rotation model maintains its bullish bias, and the climate overall still seems favorable for risk assets like equities. However, while I was optimistic about solid market performance going into July, I think August might be a different story if the new levels of psychological resistance fail to break and volatility rears its head in this typically-languid month. Read on....

Scott MartindaleBy Scott Martindale
President, Sabrient Systems LLC

The major US stock indexes continue to hold near their highs, awaiting the next upside catalyst, supported by persistently low interest rates, record share buybacks, net solid economic reports, and continued organic growth in corporate earnings – in spite of disappointments in the fiscal policy front. The S&P 500 has held solidly above 2,400, the Dow has stayed above 21,000, the Russell 2000 has held 1,400, the Tech-heavy Nasdaq Composite has held 6,000 despite a severe pullback in the market-leading large-cap Tech stocks, and oil has held above the critical $40 mark despite being in a general downtrend since the start of the year.

Recent momentum resides in Transportation, Financial, and small caps, which is a bullish development. In fact, the Dow Jones Transportation Average is setting new highs and is in full-on breakout mode.

In this periodic update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review Sabrient’s weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable ETF trading ideas. In summary, our sector rankings still look slightly bullish, while the sector rotation model maintains its bullish bias and the climate overall still seems favorable for risk assets like equities – particularly dividend payers, small caps, and GARP stocks (i.e., growth companies among all caps selling at attractive forward PEG ratios). Moreover, July is typically a solid month for stocks, a strong first half typically bodes well for the second half, and the technical picture still looks favorable. Read on...

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