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....

by Scott Martindale
President, Sabrient Systems LLC

The S&P 500 finished 2017 by completing an unusual feat. Not only was the index up +22% (total return), but every single month of the year saw positive performance on a total return basis, and in fact, the index is on a 14-month winning streak (Note: the previous record of 15 straight was set back in 1959!). So, as you might expect, volatility was historically low all year, with the VIX displaying an average daily closing value of 11 (versus a “fear threshold” of 15 and a “panic threshold” of 20). But some of 2017’s strength was due to expansion in valuation multiples in anticipation of tax reform and lower effective tax rates boosting existing earnings, not to mention incentives for repatriating overseas cash balances, expansion, and capex.

Sector correlations also remained low all year, while performance dispersion remained high, both of which are indications of a healthy market, as investors focus on fundamentals and pick their spots for investing – rather than just trade risk-on/risk-off based on the daily news headlines and focus on a narrow group of mega-cap technology firms (like 2015), or stay defensive (like 1H2016). And Sabrient’s fundamentals-based portfolios have thrived in this environment.

Now that the biggest tax overhaul in over 30 years is a reality, investors may do some waiting-and-watching regarding business behavior under the new rules and the impact on earnings, and there may be some normalization in valuation multiples. In other words, we may not see 20% gains in the S&P 500 during 2018, but I still expect a solidly positive year, albeit with some elevated volatility.

In this periodic update, I provide a market outlook, conduct a technical analysis of the S&P 500 chart, review Sabrient’s latest fundamentals-based SectorCast rankings of the ten US business sectors, and 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. Read on....

Scott Martindaleby Scott Martindale
President, Sabrient Systems LLC

Stocks are rocketing to new highs almost every day. Jeff Bezos of Amazon.com (AMZN) saw his net worth exceed $100 billion. Bonds are still strong (and interest rates low). Real estate pricing is robust. DaVinci painting sells for $450 million. Bitcoin – having no intrinsic value other than a frenzy of speculative demand – trades above $11,000 (up from $1,000 on January 1), with surprising enthusiasm brewing among institutional investors, including some of the wealthiest and most successful, and with futures and derivatives on cryptocurrencies in the pipeline. (By the way, if you are afraid of a global internet crash disrupting your holdings, fear not, as there is a bitcoin satellite accessible by dish.)

Investors are desperately seeking the next hot area before it gets bid up. (Maybe marijuana stocks are next, in anticipation of broader legalization.) Indeed, central bank monetary policies have created significant asset inflation, with cheap money from around the globe burning a hole in investors’ pockets. So now it’s high time to invite to the party some of the huddled masses (who don’t have direct access to the Fed’s largesse) – through fiscal stimulus. We are already getting some of that in the form of regulatory reform, which the Administration has largely done on its own. But the eagerly anticipated big-hitter is tax reform, which requires the cooperation of Congress. And despite the Republicans’ inability to come to consensus on anything else, investors are already bidding up equities in anticipation of the House and Senate reconciling a tax bill that becomes law – so expect to see a big correction if it fails.

The promise of regulatory and tax reform have kept me positive all year on mid and small caps as the primary beneficiaries, and I remain so now more than ever. In addition, they offer a way to better leverage continued economic expansion and rising equity prices, particularly those that supply (or that seek to take away a small piece of a growing pie from) the dominant mega caps. Moreover, as the valuations for the mega-cap Technology names in particular grow ever more elevated, we are starting to see a passing of the baton to smaller players and 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 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 and a persistently low interest rate environment continues to foster low volatility and an appetite for risk assets. 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

In late May, the major US stock indexes finally eclipsed those pesky psychological levels and hit new highs, and this week they have managed to maintain the breakout even in the face of James Comey’s Congressional testimony and the British election, not to mention more saber-rattling from North Korea. The S&P 500 has held above 2,400, and the Dow has maintained the 21,000 level. The ultra-strong and Tech-heavy Nasdaq regained 6,300 and the Russell 2000 small caps moved back above 1,400 after both briefly pulling back below to test support early in the week. They both showed notable strength on Thursday after the James Comey testimony. Such backing-and-filling and technical consolidation was inevitable given that the proverbial “rubber band” was stretched so tight, with price rising well above the moving averages.

With the strength in Nasdaq, it should come as no surprise that the Technology sector has been by far the top performing sector, up about +22% year to date, while Energy has struggled, falling about -15% YTD. Notably, on Wednesday, oil prices fell more than 4% due to an unexpected rise in U.S. crude inventories.

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. Volatility remains historically low, economic conditions continue to improve, and overall, the climate seems quite 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). Read on....

By Scott Martindale
President, Sabrient Systems LLC

Stocks continue to hold up well, encouraged by improving global fundamentals and a solid Q1 corporate earnings season. However, at the moment most of the major US market indices are struggling at key psychological levels of technical resistance that have held before, including Dow at 21,000, S&P 500 at 2,400, and Russell 2000 at 1,400. Only the Tech-heavy NASDAQ seems utterly undeterred by the 6,100 level, after having no problem blasting through the 6,000 level with ease last month and setting record highs almost daily. Perhaps the supreme strength in Tech will be able to lead the broader market through this tough resistance level. Every time it appears stocks are on the verge of a major correction, they catch a bid at an important technical support level. In other words, cautious optimism remains the MO of investors – despite weighty geopolitical risks and, here at home, furious political fighting at a level of viciousness I didn’t think possible in the U.S.

There is simply no denying the building momentum in broad global economic expansion, and any success in implementing domestic fiscal stimulus will just add even more fuel to this burgeoning fire. That’s not to say that we won’t see a nasty selloff at some point this year, but I think such an occurrence would have a news-driven (or Black Swan) trigger, and likely would ultimately serve as a broad-based buying opportunity.

In this periodic update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review Sabrient’s weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable ETF trading ideas. Overall, our sector rankings still look bullish, while the sector rotation model has returned to a bullish bias even though stocks now struggle at strong psychological resistance levels.  Read more....

The S&P 500 large caps closed 2015 essentially flat on a total return basis, while the NASDAQ 100 showed a little better performance at +8.3% and the Russell 2000 small caps fell -5.9%. Overall, stocks disappointed even in the face of modest expectations, especially the small caps as market leadership was mostly limited to a handful of large and mega-cap darlings. Notably, the full year chart for the S&P 500 looks very much like 2011.

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