Sabrient - Monthly Analysis of the Market Based on Sabrient Filters

By David Brown, Chief Market Strategist

[Editor's Note: What the Market Wants for September is based on Sabrient's filter backtesting results for August.]

Unlike recent months, it was good to be a stock in August. The markets advanced in one of the broadest rallies in recent memory, led by the Nasdaq composite which was up 4.4%. Virtually all caps and styles were up between 200 and 300 basis points. Small-caps enjoyed slightly better returns than the larger indices and growth performed slightly better than value, but the rally was good to everyone.

While the August rally was very broad, the best performers were clearly those that had the poorest performance in the previous months (i.e., good-valuation-to-earnings-growth ratios), particularly the ones with recent earnings momentum and/or recent upward revisions in earnings forecasts. Worthy of note in the value sector was the market’s across-the-board return to providing extra reward to companies with very favorable ‘price-to-whatever’ ratios. This category had not fared well during May through July, but it performed well above the market during August.

Being the end of summer, August is perhaps not indicative of what to expect from the market during the fall, so it is difficult to say that we should draw any serious conclusions from this one-month respite in the bearish trend that began in February. Granted, oil prices have eased somewhat and interest rates have receded a bit, but concerns about higher rates and prices are still with us, and no reasonable person can imagine that world events are any less threatening.

So despite the gloomy end to July, we are entering September feeling a bit better but still quite cautious. Under these circumstances, it would seem that the best strategy might be to stay with favorably valued positions that have exhibited recent favorable earnings growth.

We’ll review the market behavior again the second week in October.