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…

By Scott Martindale
President, Sabrient Systems LLC

Fear of missing out is suddenly the prevailing sentiment, overwhelming the previously dominant fear of an imminent selloff. I think this is due to a combination of: 1) uncertainty being lifted regarding the election, 2) domestic optimism about the US economy and business-friendly fiscal policies, 3) foreign investors seeing the US as the favored investment destination, 4) the expectation of rising inflation and interest rates rotating capital out of bonds and into stocks, and 5) a cautious but still accommodative Fed. Now that investors can focus on the many positive fundamentals instead of the news headlines, we are seeing healthy market breadth and diverse leadership led by value and small cap stocks rather than just the mega-cap growth stocks (e.g., “FANG”). Such sentiment has been a boon for fundamentals-based portfolios like Sabrient’s. But of course, everyone wants to know, how much further can this rally go? And what happens when it inevitably hits a wall?

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 look slightly bullish as post-election adjustments to sell-side EPS estimates are gaining traction in the model, and the sector rotation model continues to suggest a bullish stance.

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