by Scott Martindale
  CEO, Sabrient Systems LLC

Quick note: Sabrient’s annual Forward Looking Value 14 portfolio just launched last week on 8/26 with a diverse mix of 31 stocks across 9 business sectors and a 50/50 Large/SMID-cap mix. Think of it as a less-concentrated and more value-oriented version of Baker’s Dozen. Last year’s FLV 13 terminates 11/17 and is up +38.4% vs. +19.4% for S&P 500 Value (SPYV) and +20.2% for S&P 500 (SPY) as of 9/2. I personally like the UIT structure as a diversifier for a client’s equity portfolio because they are unmanaged—while most other products are managed to some extent, even quarterly rebalanced rules-based indexes—and most active managers tend to underperform their benchmarks. Also, value stocks tend not to be as volatile, so value or dividend portfolios tend to fit well with the unmanaged, buy-and-hold-for-15-months structure.

Overview:

The US economy is changing faster than the traditional macro indicators can explain it. On the one hand, Q2 GDP (just +1.5%) and jobs growth look sluggish, inflation is sticky, debt and bond yields are surging, and the bifurcated “K-shaped” economy is causing poor consumer sentiment and public dissatisfaction—to the point that socialism(!) is gaining traction. The top 10% by net worth own 87% of stocks and 68% of total net worth, while the bottom 50% own just 1% of stocks but carry 52% of consumer debt. Consumer debt is rising while the personal savings rate remains low to support spending. Real (inflation-adjusted) consumer spending was essentially flat in July, while the personal savings rate finally edged up slightly to 3.0% in July after a steady decline from 6.4% in January 2024 to as low as 2.6% in June 2026.

On the other hand, the official Q2 GDP reading was held down by high AI-related imports and inventory drawdowns, which actually reflect robust economic activity. Private domestic demand (considered a truer signal of underlying economic health) was quite strong in Q2 at +4.2% annualized rate, consumer spending was up +3.4%, business investment excluding housing was up +8.5%. Indeed, the Atlanta Fed’s GDPNow now forecasts Q3 GDP at 4.7% (as of 9/3). Corporate profits, productivity, margins, cash flow, and capex are massive. Jobless claims in our “low-hire, low-fire” labor market are near their lowest level in decades, which Fed chairman Kevin Warsh calls "an empirically robust real-time indicator” constrained only by flattening labor supply (a lack of willing workers).

Perhaps the low personal savings rate is to be expected as Baby Boomers retire and draw down their wealth, and household debt as a percentage of disposable personal income has stopped rising in Q1-Q2. Stocks are near all-time highs even though interest rates have become punitive (compared to what the broad economy had become accustomed to), and market breadth is improving.

While these data points might seem like contradictions, they may in fact be a predictable reflection of a structural transition toward a more capital-intensive, AI-driven, productivity-led economy.

Regarding inflation and Fed policy, Warsh stated in his Jackson Hole speech, “Certain sectors—like housing and agriculture—are showing strains. But, on balance, I would be hard pressed to describe broad financial conditions as restrictive…. We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do.” But you likely heard it paraphrased as simply, “Inflation is running too hot…financial conditions are not restrictive…we have work to do,” which is clearly more hawkish than his actual statement and seemingly a fait accompli that rate hikes are imminent. Fed funds futures now imply 2+ rate hikes over the next 12 months, with 50% odds of a 25-bp hike at the upcoming FOMC meeting this month.
 
However, I humbly disagree. I think Warsh’s actual statement cleverly balanced between sounding sufficiently hawkish to appease the “bond vigilantes” while leaving himself an opening to avoid hiking rates. Most of the non-supply-shock components of inflation are relatively subdued, and by some key metrics, underlying inflation is indeed moving toward the 2% objective—for example, Warsh’s preferred Trimmed Mean PCE has held steady at +2.3% in June/July, and the real-time, blockchain-based Truflation CPI is also +2.3% (as of 9/3). Meanwhile, all is not well in this K-shaped economy. The labor market is stagnant, the lower/working class consumer and wage earner is struggling, and monetary policy is clearly restrictive in the most rate-sensitive industries and demographics.

We can’t continue to rely solely on massive AI capex and retiring Baby-Boomer spending (neither of which are particularly rate sensitive) to power our economy while watching the lower leg of the K languish. All it takes is for one hyperscaler to announce a significant reduction in capex and we’ll likely see economic growth fall—along with the stock market.

So, I continue to believe a rate cut is appropriate—certainly not a hike (as fed funds futures and Polymarket confidently predict). A hike would only further hinder those struggling cash-poor segments (many of whom are warming up to the socialist “free stuff” rhetoric) while doing little to restrain the cash-rich AI trade or resolve the event-driven supply shock. I feel alone in the woods on this, but I see the neutral rate at 3.0-3.25%. Unfortunately, such an action apparently would be quite unpopular in the bond market and thus is unlikely to happen anytime soon, thus keeping the economy bifurcated. However, in speeches this week, Fed governor Christopher Waller and NY Fed president John Williams pumped the brakes on the tightening narrative (“Give disinflation a chance”).

Kevin Warsh has suggested in the past a preference for fulfilling his mandate of price stability through a combination of: 1) a lower fed funds rate, 2) continued balance sheet reduction to constrain money supply growth (including a revised Treasury-Fed relationship that gives the Treasury more say over balance-sheet decisions), and 3) structural reform of how inflation is measured (replacing the lagged and imputed components). This approach would ensure that liquidity is cheaper to access, preventing credit markets from locking up without flooding the entire financial system with inflationary liquidity. Less Fed demand for bonds might steepen the yield curve somewhat and keep 30-year mortgage rates elevated, but a lower fed funds rate reduces rates on short-term construction loans and adjustable mortgages.

According to global liquidity expert Michael Howell of CrossBorder Capital, the “Fed does not need to cut Fed funds to loosen US monetary conditions. It can hold the policy rate steady while Treasury bill issuance, reserve management and bank balance-sheet expansion deliver the liquidity impulse. This is the essence of ‘Treasury QE’: fiscal expansion financed at the short end, supported by enough reserve liquidity to keep funding markets orderly.”

By the way, regarding the sudden tariff flare-up with Canada, our neighbor’s retaliation could have targeted industrial inputs but instead it’s notable that they only apply to food and consumer products in an (admittedly) targeted effort to pressure Republican candidates in competitive US midterm election races in swing states like Pennsylvania, Michigan, and Wisconsin, and red states like Ohio, Indiana, and Kentucky.

In my full commentary below, I discuss:

1. Broadening continues as small caps, value, and the S&P 493 carry the baton
2. High earnings vs. high yields and the impact on valuations
3. The NVIDIA juggernaut and AI Phase II: proving the economy-wide ROI
4. Materials and power constraints on the AI buildout
5. K-shaped economy, inflation, and the Fed’s policy dilemma
6. Runaway Federal debt and the need to grow our way out of it
7. Crude oil inventory drawdown and oil company windfall profits
8. My Final Comments essay: Is AI opposition a nuclear power redux?
9. Sabrient’s sector rankings, positioning of our sector rotation model, and some top-ranked ETF ideas

According to Morgan Stanley, AI’s diffusion across the global economy is a $40 trillion opportunity that will rely on affordable compute. Indeed, there is so much demand for compute, some say it is becoming a new asset class—like stocks, bonds, commodities, real estate, private credit, crypto, collectibles, royalties, cash-flowing private businesses, or carbon credits. Pending regulatory review, CME Group and Silicon Data have announced plans to launch futures contracts on compute by tracking daily and hourly on-demand GPU rental cost indexes for NVIDIA's H100 and next-gen Blackwell B200 chips. This allows a company reliant on AI to lock in a future price and ensure delivery from a new datacenter that takes 2-3 years to build.

Some are worried about falling token prices hurting the projected ROI on capex. But at the Google I/O 2026 Conference, CEO Sundar Pichai said that AI is using 3.2 quadrillion tokens per month, which is up 7x YoY. Indeed, rapidly falling inference costs can create demand that didn’t exist at previous prices. This is largely due to Jevons Paradox, which says efficiency gains lower production cost, which gets passed on to customers, thus driving up demand, which increases total resource usage over time—i.e., demand for a product or resource rises as price falls (aka demand elasticity). So, if the hyperscaler can produce and sell compute tokens cheaper, usage surges, and the hyperscaler makes more money overall. It seems this trend can only be disrupted by misguided (or deliberately subversive) politicians hell-bent on obstructing this broad, multi-layered, truly all-in, capital-investment cycle, as I discuss further in my Final Comments essay below.

This is just one of the many reasons I expect to see, through the end of this decade and likely beyond, smaller government and less low-ROI government spending in favor of more high-ROI capital allocation from an unleashed private sector as the primary engine of organic economic growth through fiscal support like favorable tax policy, deregulation, and other supply-side incentives for reshoring/onshoring to increase productive capacity.

As such, I still think the S&P 500 could reach 8,000 by year end. However, I also think a further market pullback this month is likely, perhaps to test support at the 50-day moving average, and as a reminder, September is the only month since 1975 in which the S&P 500 has averaged a net loss (-0.8%). But assuming continued healthy market broadening beyond the Big Tech titans, and praying the Fed does not start tightening, I continue to see opportunities in active stock selection, equal-weight indexes, value stocks, cyclical sectors, small caps, and bond-alternative dividend payers. I also continue to believe the Healthcare sector, which finally came alive this year, offers tremendous growth opportunities as it leverages AI. Sector earnings for Healthcare Select SPDR (XLV) are projected to rise by 22% YoY in 2027, which is second only to Technology.

Sabrient’s quant-based, actively selected (“quantamental”) Baker’s Dozen, Forward Looking Value, Dividend, and Small Cap Growth portfolios have been largely outperforming their benchmarks—several by substantial margins. And as a reminder, our Earnings Quality Rank (EQR) is licensed as a quality prescreen to the actively managed, low-beta First Trust Long-Short ETF (FTLS), which now has more than $2.5 billion in AUM.

Here is a link to this full post in printable PDF format. As always, I’d love to hear from you! Please feel free to email me your thoughts on this article or if you’d like me to speak on any of these topics at your event.  Read on….

  by Scott Martindale
  President & CEO, Sabrient Systems LLC

I have been warning that the longer the market goes up without a significant pullback, the worse the ultimate correction is likely to be. So, with that in mind, we might not have seen the lows for the year quite yet, as I discuss in the chart analysis later in this post. January saw a maximum intraday peak-to-trough drawdown on the S&P 500 of -12.3% and the worst monthly performance (-5.3%) for the S&P 500 since March 2020 (-12.4%). It was the worst performance for the month of January since 2009 (during the final capitulation phase of the financial crisis) and one of the five worst performances for any January since 1980. The CBOE Volatility Index (VIX), aka “fear gauge,” briefly spiked to nearly 39 before settling back down to the low-20s.

It primarily was driven by persistently high inflation readings – and a suddenly hawkish-sounding Federal Reserve – as the CPI for the 12 months ending in December came in at 7.0% YoY, which was the largest increase for any calendar year since 1981. Then on Feb 10, the BLS released a 7.5% CPI for January, the highest YoY monthly reading since 1982. Of course, stocks fell hard, and the 10-year T-note briefly spiked above 2% for the first time since August 2019.

Looking under the hood is even worse. Twelve months ago, new 52-week highs were vastly outpacing new 52-week lows. But this year, even though new highs on the broad indexes were achieved during January, we see that 2/3 of the 3,650 stocks in the Nasdaq Composite have fallen at least 20% at some point over the past 12 months – and over half the stocks in the index continue to trade at prices 40% or more below their peaks, including prominent names like DocuSign (DOCU), Peloton Interactive (PTON), and of course, Meta Platforms, nee Facebook (FB). Likewise, speculative funds have fallen, including the popular ARK Innovation ETF (ARKK), which has been down as much as -60% from its high exactly one year ago (and which continues to score near the bottom of Sabrient’s fundamentals based SectorCast ETF rankings).

Pundits are saying that the “Buy the Dip” mentality has suddenly turned into “Sell the Rip” (i.e., rallies) in the belief that the fuel for rising asset prices (i.e., unlimited money supply and zero interest rates) soon will be taken away. To be sure, the inflation numbers are scary and unfamiliar. In fact, only a minority of the population likely can even remember what those days of high inflation were like; most of the population only has experienced decades of falling CPI. But comparing the latest CPI prints to those from 40 years ago has little relevance, in my view, as I discuss in the commentary below. I continue to believe inflation has been driven by the snapback in demand coupled with slow recovery in hobbled supply chains – largely due to “Nanny State” restrictions – and that inflationary pressures are peaking and likely to fall as the year progresses.

In response, the Federal Reserve has been talking down animal spirits and talking up interest rates without actually doing much of anything yet other than tapering its bond buying and releasing some thoughts and guidance. The Fed’s challenge will be to raise rates enough to dampen inflation without overshooting and causing a recession, i.e., the classic policy mistake. My prediction is there will be three rate hikes over the course of the year, plus some modest unwinding of its $9 trillion balance sheet by letting some maturing bonds roll off. Note that Monday’s emergency FOMC meeting did not result in a rate hike due to broad global uncertainties.

Longer term, I do not believe the Fed will be able to “normalize” interest rates over the next decade, much less the next couple of years, without causing severe pain in the economy and in the stock and bond markets. Our economy is simply too levered and “financialized” to absorb a “normalized” level of interest rates. But if governments around the world (starting with the US and Canada!) can stand aside and let the economy work without heavy-handed societal restrictions and fearmongering, we might see the high supply-driven excess-demand gap close much more quickly.

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 quant rankings of the ten US business sectors, and serve up some actionable ETF trading ideas. To summarize, our SectorCast rankings reflect a bullish bias, with the top three scorers being deep-cyclical sectors, Energy, Basic Materials, and Financials. In addition, the near-term technical picture remains weak, and our sector rotation model moved from a neutral to a defensive posture this week as the market has pulled back.

Overall, I expect a continuation of the nascent rotation from aggressive growth and many “malinvestments” that were popular during the speculative recovery phase into the value and quality factors as the Fed tries to rein in the speculation-inducing liquidity bubble. And although I don’t foresee a major selloff in the high-valuation-multiple mega-cap Tech names, I think investors can find better opportunities this year among high-quality stocks outside of the Big Tech favorites – particularly among small and mid-caps – due to lower valuations and/or higher growth rates, plus some of the high-quality secular growth names that were essentially the proverbial “baby thrown out with the bathwater.” But that’s not say we aren’t in for further downside in this market over the near term. In fact, I think we will see continued volatility and technical weakness over the next few months – until the Fed’s policy moves become clearer – before the market turns sustainably higher later in the year.

Regardless, Sabrient’s Baker’s Dozen, Dividend, and Small Cap Growth portfolios leverage our enhanced Growth at a Reasonable Price (GARP) selection approach (which combines quality, value, and growth factors) to provide exposure to both the longer-term secular growth trends and the shorter-term cyclical growth and value-based opportunities – without sacrificing strong performance potential. Sabrient’s new Q1 2022 Baker’s Dozen launched on 1/20/2022 and is already off to a good start versus the benchmark. In addition, our Dividend and Small Cap Growth portfolios have been performing well versus their benchmarks. In fact, all 7 of the Small Cap Growth portfolios launched since the March 2020 COVID selloff have outperformed the S&P 600 SmallCap Growth ETF (SLYG), and 7 of the 8 Dividend portfolios have outperformed the S&P 500 (SPY). In particular, the Energy sector still seems like a good bet, as indicated by its low valuation and high score in our SectorCast ETF rankings.

Furthermore, we have created the Sabrient Quality Index Series comprising 5 broad-market and 5 sector-specific, rules-based, strategic beta and thematic indexes for ETF licensing, which we are pitching to various ETF issuers. Please ask your favorite ETF wholesaler to mention it to their product team!
Read on....

  by Scott Martindale
  President & CEO, Sabrient Systems LLC

  As the New Year gets underway, stocks have continued their impressive march higher. Comparing the start of this year to the start of 2019 reveals some big contrasts. Last January, the market had just started to recover from a nasty 4Q18 selloff of about 20% (a 3-month bear market?), but this time stocks have essentially gone straight up since early October. Last January, we were still in the midst of nasty trade wars with rising tariffs, but now we have a “Phase 1” deal signed with China and the USMCA deal with Mexico and Canada has passed both houses of Congress. At the beginning of last year, the Fed had just softened its hawkish rhetoric on raising rates to being "patient and flexible" and nixing the “autopilot” unwinding of its balance sheet (and in fact we saw three rate cuts), while today the Fed has settled into a neutral stance on rates for the foreseeable future and is expanding its balance sheet once again (to shore up the repo market and finance federal deficit spending (but don’t call it QE, they say!). Last year began in the midst of the longest government shutdown in US history (35 days, 12/22/18–1/25/19), but this year’s budget easily breezed through Congress. And finally, last year began with clear signs of a global slowdown (particularly in manufacturing), ultimately leading to three straight quarters of YOY US earnings contraction (and likely Q4, as well), but today the expectation is that the slowdown has bottomed and there is no recession in sight.

As a result, 2019 started with the S&P 500 displaying a forward P/E ratio of 14.5x, while this year began with a forward P/E of 18.5x – which also happens to be what it was at the start of 2018, when optimism reigned following passage of the tax cuts but before the China trade war got nasty. So, while 2018 endured largely unwarranted P/E contraction that was more reflective of rising interest rates and an impending recession, 2019 enjoyed P/E expansion that essentially accounted for the index’s entire performance (+31% total return). Today, the forward P/E for the S&P 500 is about one full standard deviation above its long-term average, but the price/free cash flow ratio actually is right at its long-term average. Moreover, I think the elevated forward P/E is largely justified in the context of even pricier bond valuations, low interest rates, favorable fiscal policies, the appeal of the US over foreign markets, and supply/demand (given the abundance of global liquidity and the shrinking float of public companies due to buybacks and M&A).

However, I don’t think stocks will be driven much higher by multiple expansion, as investors will want to see rising earnings once again, which will depend upon a revival in corporate capital spending. The analyst consensus according to FactSet is for just under 10% EPS growth this year for the S&P 500, so that might be about all we get in index return without widespread earnings beats and increased guidance, although of course well-selected individual stocks could do much better. Last year was thought to be a great setup for small caps, but alas the trade wars held them back from much of the year, so perhaps this will be the year for small caps. While the S&P 500 forward P/E has already risen to 19.0x as of 1/17, the Russell 2000 small cap index is 17.2x and the S&P 600 is only 16.8x.

Of course, there are still plenty of potential risks out there – such as a China debt meltdown, a US dollar meltdown (due to massive liquidity infusions for the dysfunctional repo market and government deficit spending), a US vote for democratic-socialism and MMT, a military confrontation with Iran, or a reescalation in trade wars – but all seem to be at bay for now.

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, while the technical picture also is quite bullish (although grossly overbought and desperately in need of a pullback or consolidation period), and our sector rotation model retains its bullish posture. Notably, the rally has been quite broad-based and there is a lot of idle cash ready to buy any significant dip.

As a reminder, Sabrient now publishes a new Baker’s Dozen on a quarterly basis, and the Q1 2020 portfolio just launched on January 17. You can find my latest slide deck and Baker’s Dozen commentary at http://bakersdozen.sabrient.com/bakers-dozen-marketing-materials, which provide discussion and graphics on process, performance, and market conditions, as well as the introduction of two new process enhancements to our long-standing GARP (growth at a reasonable price) strategy, including: 1) our new Growth Quality Rank (GQR) as an alpha factor, which our testing suggests will reduce volatility and provide better all-weather performance, and 2) “guardrails” against extreme sector tilts away from the benchmark’s allocations to reduce relative volatility. Read on....

  by Scott Martindale
  President, Sabrient Systems LLC

The early weeks of September were looking so promising as a brief but impressive surge gave hope of a revival in the long-neglected market segments. This sustained risk-on rotation seemed to be marking a bullish change of market character from the risk-off defensive sentiment that I have been writing about extensively for the past 18 months (ever since the China trade war escalated in June of last year), specifically the massive divergence favoring the low-volatility, growth, and momentum factors, defensive sectors, and large caps over the value and high-beta factors, cyclical sectors, and small-mid caps. But then, for the next few weeks, those risk-on market segments were once again lagging, as fickle investors keep returning to stocks displaying stronger balance sheets, high dividend yields, and/or secular growth stories – in spite of high valuations – rather than the more speculative cyclical growth stocks selling at attractive valuations that typically lead an upside breakout. It appeared that the fledging bullish rotation was caput – or perhaps not. Suddenly, there have been positive developments in the trade negotiations and in the Brexit saga, and the past several days have brought back renewed signs of a pent-up desire to take stocks higher. Signs of a better than expected Q3 earnings season may be the final catalyst.

Of course, although YTD returns in US stocks are impressive, if you look back over the past year to when the major indexes peaked in 3Q2018, stocks really have made very little headway. As of the close on Tuesday, the S&P 500 is +21.3% YTD but only +1.7% since its 2018 high on 9/20/18, while the more speculative Russell 2000 small cap index is still more than -12% below its all-time high from over a year ago – way back on 8/31/18. The biggest difference this year versus the 9/20/18 high for the S&P 500 is that Treasury yields have fallen (from 3.1% to about 1.8% on the 10-year), which has allowed for P/E multiple expansion (from 16.8x last year to 17.2x today) despite the earnings recession of the past three quarters.

I suppose one can hardly blame investors for their trepidation at this moment in time, given the overabundance of extremely negative news, which only expanded during Q3. We have an intractable trade war with the world’s second largest economy, intensifying protectionist rhetoric, North Korean missiles, rising tensions with Iran, a brewing war in northern Syria, drone attacks in Saudi Arabia, riots in Hong Kong, China’s feud with the NBA (and the animated TV show South Park!), a slowing global economy, a US corporate earnings recession, flattish yield curve, surging US dollar, low-yield/high-volatility Treasury bonds, falling consumer sentiment, Business Roundtable’s CEO Economic Outlook Index down six consecutive quarters (as hiring is strong but capital investment and sales expectations lag), the steepest contraction in the manufacturing sector since June 2009, UAW strike against General Motors (GM), looming Hard Brexit, top-polling Democratic candidates espousing MMT and business-unfriendly socialist policies, and yet another desperate attempt to impeach the President before the next election. Need I go on?

But somehow the US economy has maintained positive traction while stocks have held their ground given a persistent economic expansion, supported by dovish central banks around the world and a rock-solid US consumer. Indeed, the very fact that stocks have held up amid such a negative macro environment suggests to me that investors are just itching for a reason to rotate cash and pricey bonds into stocks – perhaps in a big way. And from a technical standpoint, such a long sideways consolidation over the past several months suggests that an upside breakout may be imminent – and likely led by those risk-on market segments. Notably, every such bullish rotation has helped Sabrient’s various growth-at-a-reasonable-price (GARP) portfolios gain ground against the SPY benchmark, so a sustained rotation would be quite welcome!

And some good news this week is offering some hope, with strong Q3 earnings reports from JPMorgan Chase (JPM) and UnitedHealth (UNH), a resumption in trade talks, progress in the GM strike, and a possible breakthrough in the Brexit negotiations. Moreover, the highly cyclical semiconductor and homebuilding industries are on fire, with iShares PHLX Semiconductor ETF (SOXX) setting a new high, and Treasury yields are creeping up.

By the way, our Sabrient Select SMA portfolio (separately managed account wrapper) is available to financial advisors as an alternative investment opportunity. The portfolio actively manages 25-35 stocks based on our “quantamental” GARP strategy. Let me know if you’d like more information.

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 now look neutral to me, while the technical picture remains bullish, and our sector rotation model retains a solidly bullish posture. Read on…

By 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...

In a year in which stock prices mostly have been driven by news rather than fundamentals, three things stood out last week. First, terrorism has taken on an unsettling new face -- the stay-at-home mom down the street or your long-time co-worker at the plant -- as the dark side of the exponential growth in social media rears its ugly head (with something much more sinister than porn sites or online bullying). Second, with the strong jobs report on Friday, the Federal Reserve seems to have all their ducks in a row to justify the first fed funds rate hike in nine years.

Bulls showed renewed backbone last week and drew a line in the sand for the bears, buying with gusto into weakness as I suggested they would. After all, this was the buying opportunity they had been waiting for. As if on cue, the start of the World Series launched the rapid market reversal and recovery. However, there is little chance that the rally will go straight up. Volatility is back, and I would look for prices to consolidate at this level before making an attempt to go higher. I still question whether the S&P 500 will ultimately achieve a new high before year end.

The week started out well as insured depositors were spared in Cyprus, and that resonated well with investors.  Furthermore, last week’s domestic economic data was quite positive especially for housing.  The Philadelphia Fed Survey was much better than expected; Initial Jobless Claims remained in the low 300K area; and LEI were as expected.

Earnings reports on Wednesday from big banks like Goldman Sachs (GS) and JPMorgan Chase (JPM) were encouraging. And Apple (AAPL) got a much-needed boost from the top tech analysts. However, Goldman’s analysts tried to throw a wet blanket on the markets earlier this week with their expectation that earnings reports overall this year would be “uninspiring” and that equity returns this year likely will be only in the single digits.

Five years ago this month, the S&P 500 hit all-time high of 1576. It closed Wednesday at 1461. Can the market make a run at that all-time high? Well, the biggest threat at the moment to bullish sentiment is the Fiscal Cliff, but both presidential candidates have a plan for dealing with it, and Congress is unlikely to want to take the fall for defying the new President and sending the country back into recession.