Scott Martindaleby Scott Martindale
President, Sabrient Systems LLC

The S&P 500 and Nasdaq Composite indexes both hit new all-time highs this week on strong breadth, and all the major indexes appear to be consolidating recent gains before attempting an upside breakout. P/E multiples are expanding, particularly among large caps, as stocks rise despite a temporary slowdown in earnings growth. Why are investors bidding up stocks so aggressively? They have stopped looking over their shoulders with fear and anxiety and are instead focused on the opportunities ahead. And on that horizon, recession fears are falling, optimism regarding a US-China trade resolution is rising, US and Chinese economic data are improving, corporate profits are better than expected, and the Fed has agreed to step out of the way. All of this reduces uncertainty that typically holds back business investment. Stocks valuations are forward looking and a leading economic indicator, so they already seem to be pricing in expectations for stronger economic growth in the Q3, Q4, and 2020.

I said in my commentary last month that I thought we may see upside surprises in Q1 and Q2 earnings announcements, given the low bar that had been reset, and indeed we are seeing higher-than-average earnings beats – including big names like Apple (AAPL) and Facebook (FB), among many others – as half of the S&P 500 companies have reported. Moreover, the recent legal settlement between Apple and Qualcomm (QCOM) was a big positive news story that should now free up both companies to focus on 5G products, including step-function upgrades to smartphones, tablets, and computers, as the critical race with China for 5G dominance kicks into high gear.

Looking ahead, there are plenty of mixed signals for the economy and stocks – and no doubt the pessimists could fill a dossier with plenty of doom and gloom. But I think the pessimism has been a positive in keeping stocks from surging too exuberantly, given all the positive data that the optimists can cite. And on balance, the path of least resistance for both the economy and stocks appears to be upward. I think bond yields will continue to gradually firm up as capital rotates from bonds to equities in an improving growth and inflation environment, stabilizing the dollar (from advancing much further), while reducing the odds of a Fed rate cut in 2019. A healthy economy helps corporate earnings, while a dovish Fed keeps rates low and supports equity valuations. And as the trade war with China comes to resolution, I expect corporations will ramp up capital spending and guidance, enticing idle cash into the market and further fueling bullish conviction. Rather than an impending recession, we may be returning to the type of growth and inflation we enjoyed just prior to the tax reform bill, which would provide a predictable environment for corporate planning and steady (but not exuberant or inflationary) corporate earnings growth.

This should bode well not only for Sabrient’s Baker’s Dozen portfolios, but also for our other growth and dividend-oriented portfolios, like Sabrient Dividend and Dividend Opportunity, each of which comprises 50 growth-at-a-reasonable-price (aka GARP) stocks paying an aggregate yield in excess of 4% in what is essentially a growth-and-income strategy, and perhaps our 50-stock Small Cap Growth portfolios. As a reminder, I am always happy to make time for conversations with advisors about market conditions and our portfolios. We are known for our model-driven growth-at-a-reasonable-price (GARP) approach, and our model is directing us to smaller caps, as many of the high-quality large caps that are expected to generate solid earnings growth already have been “bid up” relative to 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 remain bullish, while the sector rotation model also maintains a bullish posture. Read on…

Scott Martindaleby Scott Martindale
President, Sabrient Systems LLC

You might not have realized it given the technical consolidation in March, but Q1 2019 ended up giving the S&P 500 its best Q1 performance of the new millennium, and the best quarterly performance (of any quarter) since Q3 2009. Investors could be forgiven for thinking the powerful rally from Christmas Eve through February was nothing more than a proverbial “dead cat bounce,” given all the negative news about a global economic slowdown, the still-unresolved trade skirmish with China, a worsening Brexit, reductions to US corporate earnings estimates, and the Fed’s sudden about-face on rate hikes. But instead, stocks finished Q1 with a flourish and now appear to be poised to take another run at all-time highs. The S&P 500, for example, entered Q2 less than 4% below its all-time high.

Overall, we still enjoy low unemployment, rising wages, and strong consumer sentiment, as well as a supportive Fed (“Don’t fight the Fed!”) keeping rates “lower for longer” (and by extension, debt servicing expenses and discount rates for equity valuation) and maintaining $1.5 trillion in excess reserves in the financial system. Likewise, the ECB extended its pledge to keep rates at record lows, and China has returned to fiscal and monetary stimulus to revive its flagging growth stemming from the trade war. Meanwhile, Corporate America has been quietly posting record levels of dividends and share buybacks, as well as boosting its capital expenditures – which is likely to accelerate once a trade deal with China is signed (which just became more likely with the apparently-benign findings of the Mueller investigation). In addition, the bellwether semiconductor industry is presenting a more upbeat tone and an upturn from a cyclical bottom (due to temporary oversupply), while crude oil has broken out above overhead resistance at $60.

On the other hand, there is some understandable concern that US corporate earnings forecasts have been revised downward to flat or negative for the first couple of quarters of 2019. Of course, it would be preferable to see a continuation of the solid earnings growth and profitability of last year, but the good news is that revenue growth is projected to remain solid (at least 4.5% for all quarters), and then earnings is expected to return to a growth track in 2H2019. Moreover, the concurrent reduction in the discount rate (due to lower interest rates) is an offsetting factor for stock valuations.

All of this leads me to believe that economic conditions remain generally favorable for stocks. In addition, I think we may see upside surprises in Q1 and Q2 earnings announcements, especially given the low bar that has been reset. But it also may mean that investors will become more selective, with some stocks doing quite well even if the broad market indexes show only modest growth this year.

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 remain bullish and the technical picture suggests an imminent upside breakout, while the sector rotation model maintains its a bullish posture. Read on…

Scott Martindaleby Scott Martindale
President, Sabrient Systems LLC

The first two months of 2019 have treated Sabrient’s portfolios quite well. After a disconcerting 3Q2018, in which small-cap and cyclicals-heavy portfolios badly trailed the broad market amid a fear-driven defensive rotation, followed by a dismal Q4 for all stocks, the dramatic V-bottom recovery has been led by those same forsaken small-mid caps and cyclical sectors. All of our 12 monthly all-cap Baker’s Dozen portfolios from 2018 have handily outperformed the S&P 500 benchmark since then, as fundamentals seem to matter once again to investors. Indeed, although valuations can become disconnected from fundamentals for a given stretch of time (whether too exuberant or too pessimistic), share prices eventually do reflect fundamentals. Indeed, it appears that institutional fund managers and corporate insiders alike have been scooping up shares of attractive-but-neglected companies from cyclical sectors and small-mid caps in what they evidently saw as a buying opportunity.

And why wouldn’t they? It seems clear that Q4 was unnecessarily weak, with the ugliest December since the Great Depression, selling off to valuations that seem more reflective of an imminent global recession and Treasury yields of 5%. But when you combine earnings beats and stable forward guidance with price declines – and supported by a de-escalation in the trade war with China and a more “patient and flexible” Federal Reserve – it appears that the worst might be behind us, as investors recognize the opportunity before them and pay less attention to the provocative news headlines and fearmongering commentators. Moreover, I expect to see a renewed appreciation for the art of active selection (rather than passive pure-beta vehicles). However, we must remain cognizant of 2018’s lesson that volatility is not dead, so let’s not be alarmed if and when we encounter bouts of it over the course of the year.

Looking ahead, economic conditions appear favorable for stocks, with low unemployment, rising wages, strong consumer sentiment, and solid GDP growth. Moreover, Q4 corporate earnings are still strong overall, with rising dividends, share buybacks at record levels, and rejuvenated capital investment. So, with the Fed on the sidelines and China desperately needing an end to the trade war, I would expect that any positive announcement in the trade negotiations will recharge the economy in supply-side fashion, as US companies further ramp up capital spending and restate guidance higher, enticing risk capital back into stocks (but again, not without bouts of volatility). This should then encourage investors to redouble their current risk-on rotation into high-quality stocks from cyclical sectors and small-mid caps that typically flourish in a growing economy – which bodes well for Sabrient’s growth-at-a-reasonable-price (GARP) portfolios.

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 remain bullish, while the sector rotation model has returned to a bullish posture. Read on…

Scott Martindaleby Scott Martindale
President, Sabrient Systems LLC

There is a stock market adage that says, “as goes January, so goes the year.” Well, if that comes true this year, we are in for some robust gains, as stocks just enjoyed the strongest January since 1987 (when it rose +13.2%). For the full month of January, the S&P 500 gained +8.0% (and S&P mid and small caps were even stronger at around +10.5%). Meanwhile, after a dismal 2H2018 in which Sabrient’s cyclicals-heavy portfolios trailed the broad market in the wake of a fear-driven defensive rotation that began in June, our 12 monthly all-cap Baker’s Dozen portfolios from 2018 handily outperformed by gaining an average of +11.8% for the full-month of January (and +19.7% since the low on Christmas Eve through 1/31, versus +15.2% for the SPY), and our actively-managed SMA portfolio (which holds 30 GARP stocks) gained +13.2%. Fundamentals seem to matter again, and institutional fund managers and corporate insiders have been suddenly scooping up shares of attractive-but-neglected companies in what they evidently see as a welcome buying opportunity.

On the other hand, it’s pretty clear to me that 4Q2018 was unnecessarily weak, with the ugliest December since the Great Depression, selling off to valuations that seem more reflective of an imminent global recession and Treasury yields of 5%. So, some might argue that January’s big rally was just a temporary bounce from massively oversold conditions – a case of “righting the ship” back to more appropriate valuations – and as such is giving us little indication about the balance of the year.

My view is more on the bullish side. When you combine earnings beats and stable or rising forward guidance with price declines, it sure seems to me that the worst is behind us, as investors recognize the opportunities before them and pay less attention to the gloomy news headlines and fearmongering commentators. Moreover, I expect to see a renewed appreciation for active management and a return to a more selective stock-picker’s market, with a rising stock market fueled by a de-escalation (or preliminary resolution) to the trade war with China and a more patient and accommodative Fed. In fact, as I said at the start of the year, I think the S&P 500 will finish the year with a gain in the 20-25% range – but savvy stock selection could produce even better returns. However, please be cognizant of 2018’s lesson that volatility is not dead, so try not to be alarmed when we encounter bouts of it over the course of the year.

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 remain slightly bullish, while the sector rotation model has returned to a neutral posture after a few months of defensiveness. Read on…

Scott Martindaleby Scott Martindale
President, Sabrient Systems LLC

After an “investor’s paradise” year in 2017 – buoyed by ultra-low levels of volatility, inflation, and interest rates, and fueled even more by the promise of fiscal stimulus (which came to fruition by year end) – 2018 was quite different. First, it endured a long overdue correction in February that reminded investors that volatility is not dead, and the market wasn’t quite the same thereafter, as investors’ attention focused on escalating trade wars and central bank monetary tightening, leading to a defensive risk-off rotation mid-year and ultimately to new lows, a “technical bear market” (in the Nasdaq and Russell 2000), and the worst year for stocks since the 2008 financial crisis. Then, it was confronted with the Brexit negotiations falling apart, Italy on the verge of public debt default, violent “yellow vest” protests in France, key economies like China and Germany reporting contractionary economic data, and bellwether companies like FedEx (FDX) and Apple (AAPL) giving gloomy sales forecasts that reflect poorly on the state of the global economy. The list of obstacles seems endless.

Moreover, US stocks weren’t the only asset class to take a beating last year. International equities fared even worse. Bonds, oil and commodities, most systematic strategies, and even cryptocurrencies all took a hit. A perfect scenario for gold to flourish, right? Wrong, gold did poorly, too. There was simply nowhere to hide. Deutsche Bank noted that 93% of global financial markets had negative returns in 2018, the worst such performance in the 117-year history of its data set. It was a bad year for market beta, as diversification didn’t offer any help.

Not surprisingly, all of this has weighed heavily upon investor sentiment, even though the US economy, corporate earnings, and consumer sentiment have remained quite strong, with no recession in sight and given low inflation and interest rates. So, despite the generally positive fundamental outlook, investors in aggregate chose to take a defensive risk-off posture, ultimately leading to a massive selloff – accentuated by the rise of passive investing and the dominance of algorithmic trading – that did huge technical damage to the chart and crushed investor sentiment.

But fear not. There may be a silver lining to all of this, as it has created a superb buying opportunity, and it may finally spell a return to a more selective stock-picker’s market, with lower correlations and higher performance dispersion. Moreover, my expectation for 2019 is for a de-escalation in the trade war with China, a more accommodative Fed, and for higher stock prices ahead. Forward valuations overall have become exceedingly attractive, especially in the cyclical sectors that typically flourish in a growing economy.

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 remain bullish, while the sector rotation model remains in a defensive posture. Read on…

Scott Martindaleby Scott Martindale
President, Sabrient Systems LLC

The escalating trade standoff with China, an increasingly hawkish Federal Reserve, and the impending mid-term elections finally took a toll on investor psyche, creating a rush to the exits in October as concern rises about the sustainability of the ultra-strong corporate earnings given China’s key role in global supply chains. Even some sell-side analysts have seen fit to slightly trim Q4’s strong earnings estimates. Nonetheless, the month ended with an encouraging rally from deeply oversold technical conditions. Overall, Sabrient’s model continues to suggest that little has changed with the positive fundamental outlook characterized by solid global economic growth, strong US corporate earnings, modest inflation, low real interest rates (despite incremental rate hikes), a stable global banking system, and historic fiscal stimulus in the US (especially corporate tax cuts and deregulation) that is only starting to have an impact on all-important capital spending. Also worth mentioning are the Consumer Confidence Index, which rose to its highest level in 18 years, and the Small Business Optimism Index, which continues with the longest streak of sustained optimism in its 45-year history.

Although the S&P 500 managed to plod its way upward during the summer and hit new highs well into September, a dramatic risk-off defensive rotation commenced in mid-June reflecting cautious investor sentiment, which disproportionately impacted Sabrient’s cyclicals-heavy portfolios. But this was not a healthy rotation. In fact, I wrote during the summer that the market wouldn’t be able to move much higher without renewed breadth and leadership from cyclicals. But instead of a risk-on rotation to recharge bullish conviction, we got a big market sell-off in October. Notably, such a pullback is normal in mid-term election years, but what is also normal is a strongly positive market move over the course of the 12 months following the mid-terms.

Last week’s fledgling recovery rally from severely oversold technical conditions showed promising risk-on action – and some relative performance catch-up in Sabrient’s portfolios. Thus, while the aggregate earnings outlooks for companies in the cyclical sectors and smaller caps have held steady or in many cases improved, shares prices have fallen dramatically, making the forward P/Es in these market segments much more attractive, while forward P/Es in the defensive sectors have become quite pricey.

Getting the uncertainty of the mid-term elections behind us should be good for investor sentiment. So, I think the correction lows are in – barring a massive “blue wave” in which Democrats take over both houses of Congress or a total breakdown in the China trade talks. Also, companies are coming out of their reporting-season blackout windows so that they can resume their massive share buybacks, further goosing stock prices. All told, I anticipate a risk-on rotation spurring a year-end rally that should treat our portfolios well.

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 remain bullish, while the sector rotation model has been forced into a defensive posture due to the recent correction. 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 MartindaleGiven all the geopolitical drama and worrisome news headlines – ranging from tensions with Russia and North Korea to “Brexit 2.0” and “Frexit” to uncertainties of Trump’s fiscal stimulus to the looming debt ceiling – it’s no wonder stocks have stalled for the past several weeks. Especially troubling is the notable underperformance since March 1 in small caps and transports. Nevertheless, economic fundamentals both globally and domestically are still solid. Global growth appears to be on a positive trend that could persist for the next couple of years, and Q1 earnings season should reflect impressive year-over-year corporate earnings growth, although not without its disappointments – as we already have seen in bellwethers like Goldman Sachs (GS), Johnson & Johnson (JNJ), and International Business Machines (IBM).

I continue to like the prospects for US equities for the balance of the year. I expect breadth will be solid, correlations will stay low, and dispersion high such that risk assets continue to look attractive, including high-quality dividend payers and growth stocks, particularly small caps, which I think will ultimately outperform this year despite their recent weakness. All of this bodes well for stock-pickers.

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, although the sector rotation model has, at least temporarily, moved to a neutral stance as the short-term technical picture has become cloudy. But after the pro-EU election results in France on Sunday, stocks may be ready for an upside breakout, no matter what Trump accomplishes in this final week of his first 100 days on the job.  Read on....