Scott Martindale  by Scott Martindale
  President & CEO, Sabrient Systems LLC

Well, the election is finally upon us, and most folks on either side of the aisle seem to think that the stakes couldn’t be higher. That might be true. But for the stock market, I think removing the uncertainty will send stocks higher in a “relief rally” no matter who wins, as additional COVID stimulus, an infrastructure spending bill, and better corporate planning visibility are just a few of the slam-dunk catalysts. Either way, Modern Monetary Theory (MMT) is here, as both sides seem to agree that the only way to prevent a COVID-induced depression in a highly indebted economy is to print even more money and become even more leveraged and indebted. Now investors can only anxiously pray for a clean, uncontested election, followed soon by a reopening of schools and businesses. Stocks surely would soar.

Of course, certain industries might be favored over others depending upon the party in power, but in general I expect greater market breadth and higher prices into year-end and into the New Year. However, last week, given the absence of a COVID vaccine and additional fiscal stimulus plus the resurgence of COVID-19 in the US and Europe, not to mention worries of a contested election that ends up in the courts, stocks fell as investors took chips off the table and raised cash to ride out the volatility and prepare for the next buying opportunity. The CBOE Volatility Index (VIX) even spiked above 41 last week and closed Friday at 38, which is in panic territory (although far below the all-time high of 85.47 in March).

Nevertheless, even as the market indices fell (primarily due to profit-taking among the bigger growth names that had run so high), many of the neglected value stocks have held up pretty well. And lest you forget, global liquidity is abundant and continuing to rise (no matter who wins the election) – and searching for higher returns than ultra-low (or even negative) government and sovereign debt obligations are yielding.

All in all, this year has been a bit deceiving. While the growth-oriented, cap-weighted indexes have been in a strong bull market thanks to a handful of mega-cap Tech names, the broader market essentially has been in a downtrend since mid-2018, making it very difficult for any valuation-oriented portfolio or equal-weight index to keep up. However, since mid-July (and especially since the September lows) we have seen signs of a nascent rotation into value/cyclicals/small caps, which is a bullish sign of a healthy market. Institutional buyers are back, and they are buying the higher-quality stocks, encouraged by solid Q3 earnings reports.

Going forward, our expectation is that the historic imbalances in Value/Growth and Small/Large performance ratios will continue to gradually revert and market leadership will broaden such that strategic beta ETFs, active selection, and equal weighting will thrive once again. This should be favorable for value, quality, and growth at a reasonable price (GARP) strategies like Sabrient’s, although not to the exclusion of the unstoppable secular growth industries. In other words, investors should be positioned for both cyclical and secular growth.

Notably, Sabrient has enhanced its GARP strategy by adding our new Growth Quality Rank (GQR), which rewards companies with more consistent and reliable earnings growth, putting secular-growth stocks on more competitive footing in the rankings with cyclical growth (even though their forward valuations are often higher than our GARP model previously rewarded). As a result, our newer Baker’s Dozen portfolios launched since December 2019 reflect better balance between secular growth and cyclical/value stocks and across large/mid/small market caps. And those portfolios have shown markedly improved performance relative to the benchmark, even with this year’s continued bifurcation. Names like Adobe (ADBE), Autodesk (ADSK), Digital Turbine (APPS), Amazon (AMZN), Charter Communications (CHTR), NVIDIA (NVDA), and SolarEdge Technologies (SEDG) became eligible with the addition of GQR, and they have been top performers. But at the same time, our portfolios are also well-positioned for a broadening or rotation to value, cyclicals, and small caps. In addition, our three Small Cap Growth portfolios that have launched during 2020 using the same enhanced selection process are all nicely outperforming their benchmark. So, IMHO, this provides solid justification for an investor to take a fresh look at Sabrient’s portfolios today.

In this periodic update, I provide a comprehensive market commentary, offer my technical analysis of the S&P 500 chart, review Sabrient’s latest fundamentals-based SectorCast rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. In summary, I expect stocks to move higher once the election results are finalized – but with plenty of volatility along the way until the economy is fully unleashed from its COVID shackles. In addition, our sector rankings reflect a moderately bullish bias (as the corporate outlook is starting to clear up), the technical picture looks ready for at least a modest bullish bounce from last week’s profit-taking, and our sector rotation model retains its neutral posture. As a reminder, you can go to http://bakersdozen.sabrient.com/bakers-dozen-marketing-materials to find my latest Baker’s Dozen slide deck and commentary on terminating portfolios. Read on....

Scott Martindale  by Scott Martindale
  President & CEO, Sabrient Systems LLC

The April-August 5-month stretch was the best 5-month period for the S&P 500 (+35%) since 1938. The index was +6.3% higher than its pre-COVID high on 2/19/20 and +56.2% higher than its COVID selloff low on 3/23/20. But any market technician would tell you that the further the market rises without a pause, the more severe the inevitable pullback. And indeed, along came the traditionally challenging month of September and a nasty bout of profit-taking mixed with capital preservation – and exacerbated by the standoff on new fiscal stimulus, an uptick in COVID cases hindering global economic reopening, and the potential for a SCOTUS nomination firestorm. Many of the investor darlings from among the disruptive, secular-growth Technology companies that had been surging so strongly have suddenly fallen hard, with the S&P 500 (SPY) pulling back -10.3% from its 9/2/20 intraday high to its 9/21/20 intraday low and the tech-laden Nasdaq 100 (QQQ) falling -14.3%.

After giving back all of August’s strong gains, perhaps Monday was the capitulation day from which the market can recover anew. Q3 earnings reporting season starts in a couple of weeks, so it will be important to get a read on the trajectory of earnings recovery and forward guidance.

I have written often about the stark market bifurcation that has developed over the past few years, beginning with the unwinding of the “Trump Bump” reflation trade in light of the emerging trade wars. It led to historic extremes in Growth over Value and Large over Small caps, with the broad-market, cap-weighted indexes hitting new highs as investment capital has favored mega-cap, secular-growth Tech and passive, market-cap-weighted ETFs. But today, although I think it is unlikely that investors are giving up on Technology names, their high relative valuations as the economy enters what I see as an early-stage expansionary cycle appear to be opening the door for greater market breadth and some capital rotation into value, cyclicals, and smaller caps.

My expectation is that, as the historic imbalances in Value/Growth and Small/Large performance ratios gradually revert and market leadership broadens, strategic beta ETFs, active selection, and equal weighting should thrive once again. This should be favorable for value, growth-at-a-reasonable-price (GARP), and quality-oriented strategies like Sabrient’s, although not to the exclusion of secular growth industries. In other words, an investor should be positioned for both cyclical and secular growth.

This is why, rather than continuing to wait around for the value/growth performance gap to converge, we chose to introduce new enhancements to our GARP stock selection process to better balance value-oriented cyclical growers with consistent secular growers while also reducing relative volatility versus the benchmark. Moreover, we have leveraged our full suite of 7 core quantitative models to create 11 new strategic-beta, passive indexes. You will be hearing more about these in the near future.

In this periodic update, I provide a comprehensive market commentary, offer my technical analysis of the S&P 500 chart, review Sabrient’s latest fundamentals-based SectorCast rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. In summary, while I still have a favorable long-term view on stocks, there will be plenty of volatility ahead. In addition, our sector rankings have a moderately defensive bias (given that the near-term outlook in our fundamentals-based model is muddled and the Outlook scores are tightly bunched), the technical picture looks might be setting up for a bullish reversal, and our sector rotation model sits in a neutral posture. As a reminder, you can find my latest Baker’s Dozen slide deck and commentary on terminating portfolios at http://bakersdozen.sabrient.com/bakers-dozen-marketing-materials.

Read on....

Scott Martindale  by Scott Martindale
  President, Sabrient Systems LLC

July was yet another solid month for stocks, as the major market indexes eclipsed and held above psychological barriers, like the S&P 500 at 3,000, and the technical consolidation at these levels continued with hardly any give back at all. But of course, the last day of July brought a hint of volatility to come, and indeed August has followed through on that with a vengeance. As the old adage goes, “Stocks take the stairs up but ride the elevator down,” and we just saw a perfect example of it. The technical conditions were severely overbought, with price stretched way above its 20-day simple moving average, and now suddenly the broad indexes (S&P 500, Dow, Nasdaq) are challenging support at the 200-day moving average, while the small cap Russell 2000 index has plummeted well below its 200-day and is now testing its May low.

For the past 18 months (essentially starting with the February 2018 correction), investor caution has been driven by escalating trade wars and tariffs, rising global protectionism, a “race to the bottom” in currency wars, and our highly dysfunctional political climate. However, this cautious sentiment has been coupled with an apparent fear of missing out (aka FOMO) on a major market melt-up that together have kept global capital in US stocks but pushed up valuations in low-volatility and defensive market segments to historically high valuations relative to GARP (growth at a reasonable price), value, and cyclical market segments. Until the past few days, rather than selling their stocks, investor have preferred to simply rotate into defensive names when the news was distressing (which has been most of the time) and then going a little more risk-on when the news was more encouraging (which has been less of the time). I share some new insights on this phenomenon in today’s article.

The market’s gains this year have not been based on excesses (aka “irrational exuberance”) but instead stocks have climbed a proverbial Wall of Worry – largely on the backs of defensive sectors and mega-caps and fueled by persistently low interest rates, and mostly through multiple expansion rather than earnings growth. In addition, the recent BAML Global Fund Manager Survey indicated the largest jump in cash balances since the debt ceiling crisis in 2011 and the lowest allocation ratio of equities to bonds since May 2009, which tells me that deployment of this idle cash and some rotation out of bonds could really juice this market. It just needs that elusive catalyst to ignite a resurgence in business capital spending and manufacturing activity, raised guidance, and upward revisions to estimates from the analyst community, leading to a sustained risk-on rotation.

As a reminder, I am always happy to take time for conversations with financial advisors about market conditions, outlook, and Sabrient’s portfolios.

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 to me (i.e., neither bullish nor defensive), while the sector rotation model retains a bullish posture. Read on…

Scott Martindale

As earnings season gets underway with mixed results but a generally positive trend, Wall Street analysts are coming out with upgrades and downgrades to earnings estimates that are significantly impacting our sector rankings this week.

Scott Martindale

The market twice threatened to pullback over the past week, but each time it resumed its methodical upward trajectory. The S&P 500 set a new intra-day 52-week high on Monday, and then set another 52-week closing high on Tuesday. Sabrient’s SectorCast-ETF model shows little change from last week, with Healthcare on top, again followed by InfoTech and Consumer Discretionary.

Scott Martindale

As the market continues its slow but steady march further into overbought territory, Sabrient’s SectorCast-ETF rankings are holding steady. Energy, Healthcare and Financials still look undervalued, while Telecom, Industrials, and Materials look overvalued.

Scott Martindale

The market has gone straight up over the past week since beginning the month of March by breaking through its 50-day moving average. The top and bottom of Sabrient’s SectorCast-ETF rankings look pretty similar to last week, although there has been some shuffling as Energy takes the top spot and Healthcare re-emerges in the top two.

Scott Martindale

Well, I’ve been writing in this column that the market has been signaling that it wants to breakout to the upside, and it finally broke back above its 50-day moving average as we began the new month. Sabrient’s SectorCast-ETF rankings are mostly holding steady, with Financials, Energy, Healthcare, and InfoTech still showing the best fundamental valuations.