Northlake’s Style model flipped to neutral for August after spending three months on growth. The Market Cap model remains on large cap for the third consecutive month. To align client portfolios invested in the models with the neutral signal, one half of positions in the Russell 1000 Growth (IWF) were sold and the proceeds were invested in the Russell 1000 Value (IWD). The large cap signal from the Market Cap model continues to be implemented by investment in the S&P 500 (SPY).
Three indicators in the Style model shifted from growth to value for August triggering the change in the model’s recommendation to neutral. Over the last few days, we thought the Style model might shift given unusual volatility in growth stocks, specifically leading internet stocks, during June and July. Volatility can move the internal indicators that measure trend and market technicals. In fact, two of the Style model’s eight internal indicators moved from growth to value. Growth had been favored for the last several months based on almost unanimous alignment favoring growth. The message from the new neutral signal is a combination of a loss of momentum for growth stocks and somewhat firmer economic indicators. We are somewhat skeptical but should economic activity finally breakout to the upside, value stocks would be expected to take over leadership from growth stocks.
The Market Cap model is comfortably in large cap territory with all eight external indicators favoring large cap for the second consecutive month. Slow but steady growth in GDP favors large cap. The recent weakening in the dollar is a big boost as well, since larger companies do more business overseas. The internal indicators are split between small and large cap reflecting the rotation in market leadership between these two sectors over the last six months.
The growth signal that just closed worked pretty well. For the three months that the growth signal was in place, IWF gained 4.8% against a gain of 3.6% for the S&P 500 and 2.2% for the Russell 1000 Value (IWD).
SPY, IWF, and IWD 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.