There are no changes to Northlake’s model signals for February. For the second consecutive month, the Market Cap model favors small caps and the Style model favors small cap value. As a result, client positions in the Russell 2000 (IWM) and the Russell 2000 Value (IWN) will be maintained at least through February.
The Market Cap model saw a little deterioration in the strength of its small cap signal this month compared to last month. This occurred because two internal indicators that measure stock market trends and trading action moved from small cap to large cap reflecting large cap outperformance during January. The internal indicators are designed to be more short-term-oriented to offset the economic and interest rate based external indicators where data inputs move more slowly. The external indicators remain on firm footing for small caps for February.
The Style model still likes value and the small cap signal form the Market cap model pushes the model signal to small cap value. Similar to February’s Market Cap signal, the Style model saw modest shift toward growth in its internal indicators as growth stocks made a comeback in January, reversing a portion of their lagging performance since the election. One external indicator also shifted from value to growth. However, the overall model remains firmly in value territory with 9 of the 14 combined indicators recommending value.
The current model recommendations are consistent with our view that the Trump Trade favoring reflation, value, small caps, and regulated industries will remain in place for at least the first half of 2017. We remain cognizant of the risks of President Trump’s personality and management style and are ready to shift our sanguine outlook in response to fresh datapoints. We also remain concerned about long-term implications of massive tax cuts unaccompanied by spending discipline, changes in international trade policy, and foreign policy adventurism. For now, despite risks and volatility being elevated, we prefer to be reactive rather than proactive given our concerns are longer term in nature.
IWM and IWN are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov.