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....

Scott Martindaleby Scott Martindale
President, Sabrient Systems LLC

Some investors transitioned from a “fear of missing out” (aka FOMO) at the beginning of the year to a worry that things are now “as good as it gets” – meaning that the market is in its last bullish move before the inevitable downturn kicks in. And now, escalating trade wars and a flattening yield curve have added to those fears. However, it appears to me that little has changed with the fundamentally strong outlook characterized by global economic growth, strong US corporate earnings, modest inflation, low real interest rates, a stable global banking system, and historic fiscal stimulus in the US (including both corporate tax cuts and deregulation). Moreover, the Fed may be sending signals of a slowing of rate hikes, while great strides have been made in reworking trade deals.

Many followers of Sabrient are wondering why our Baker’s Dozen portfolios – most of which had been performing quite well until mid-June – suddenly saw performance go south even though the broad market averages have managed to achieve new highs. Their concerns are understandable. However, if you look under the hood of the S&P 500, leadership over the past three months has not come from where you would expect in a robust economy. An escalation in trade wars (moving from posturing to reality) led industrial metals prices to collapse while investors suddenly shunned cyclical sectors in favor of defensive sectors in a “risk-off” rotation, along with some of the mega-cap momentum Tech names. This was not healthy behavior reflecting the fundamentally-strong economy and reasonable equity valuations.

But consensus forward estimates from the analyst community for most of the stocks in these cyclical sectors have not dropped, and in fact, guidance has generally improved as prices have fallen, making forward valuations much more attractive. Sabrient’s fundamentals-based GARP (growth at a reasonable price) model, which analyzes the forward estimates of the analyst community, still suggests solid tailwinds and an overweight in cyclical sectors. Thus, we expect that investor sentiment will eventually fall in line and we will see a “risk-on” rotation back into cyclicals as the market once again rewards stronger GARP qualities rather than just the momentum or defensive names. In other words, we think that now is the wrong time to exit our cyclicals-heavy Baker’s Dozen portfolios. I talk a lot more about this in today’s commentary.

Of course, risks abound. One involves divergent central bank monetary policies, with some continuing to ease while others (including the US and China) begin a gradual tightening process, and the enormous impact on currency exchange rates. Moreover, the gradual withdrawal of massive liquidity from the global economy is an unprecedented challenge rife with uncertainty. Another is the high levels of global debt (especially China) and escalating trade wars (most importantly with China). Because China is mentioned in every one of these major risk areas, I talk a lot more about China in today’s commentary.

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 now look even more strongly bullish, while the sector rotation model retains its bullish posture. Read on....

Scott Martindaleby Scott Martindale
President, Sabrient Systems LLC

The secular bull market that began on March 9, 2009 in the wake of the Financial Crisis just passed its ninth anniversary last Friday, and as if to celebrate, stocks rallied big on the strong reports of jobs growth, total employment, and labor participation, while wage inflation remained modest. All in all, it was a lot of great news, but instead of selling off – as stocks have done in the past in a “good news means bad news” reaction, assuming the Fed would feel emboldened to raise rates more aggressively – stocks rallied strongly. This is a market of investors looking for reasons to buy rather than to sell, i.e., the bulls are still in charge.

Strong global fundamentals are firmly in place for the foreseeable future, while corporate earnings expectations continue to rise, inflation fears appear to have diminished, and the overall climate remains favorable for equities. After the February selloff was complete, extreme valuations had been reduced, and support levels had been tested, investors were ready to embrace good news – albeit with some renewed caution in the wake of the recent surge in volatility. As we all learned, volatility is not dead. VIX is an oscillator that always eventually mean-reverts. This will surely result in some deleveraging as well as perhaps some P/E compression from the run-up in valuations we saw in anticipation of the fiscal stimulus package.

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 regained its bullish bias during the recovery from the market correction and volatility surge. Read on....

After a nice little rally from mid-February until early June, investors started taking chips off the table, ostensibly in anticipation of Thursday’s Brexit vote. But Monday brought a fresh hint of optimism that Britain will vote to remain in the union, and the market responded with a healthy, broad-based rally. On balance, there appear to be good tailwinds for U.S. equities over the near term.

The stock market rally off the February lows initially was led by the usual combination of short-covering, oversold bottom-feeding, and speculation (on “junk"). But then market action started showing signs of improving market breadth and a rotation back into higher quality companies -- the types of companies with characteristics Sabrient typically seeks in our GARP (growth at a reasonable price) selection process. It is notable that price action for the S&P 500 was very similar during 2015 to what occurred in 2011.

March Madness is in its full glory with some of the most epic displays of competition, controversy, surprises, and visuals we have ever seen. Oh, and the NCAA basketball tournament is pretty incredible, too, but that’s not what I’m talking about. I’m talking about the U.S. presidential election. And it has produced some crazy headlines, news clips, and sound bites.

Volatility reigned in January on elevated volume as stock investors shifted their focus from global events to U.S. earnings reports, which have ranged from amazing (e.g., Apple) to crushing (e.g., Microsoft). Although the earnings reports have brought plenty of surprises, the volatility is no surprise, as I and many other market commentators predicted for the New Year.

As widely expected, the New Year has begun with plenty of volatility on high trading volume, as investors fear more than just a mild correction to start out the year. Despite the strong fundamentals here in the U.S., there are plenty of dangers around the rest of the world, and many fear that our cozy comfort at home simply cannot remain insulated for much longer.

Scott MartindaleWas that really a breakout? With the S&P 500 struggling around the 2,000 level for the past two weeks, Friday’s strong finish might seem like a bullish breakout. But the market has already given us a couple of false breakouts at this level, and although I see higher prices ahead, I’m still not convinced that we have seen all the near-term downside that Mr.

Scott MartindaleOnce again, stocks have shown some inkling of weakness. But every other time for almost three years running, the bears have failed to pile on and get a real correction in gear. Will this time be different?

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