Media Talk

Shifting Away from Small Caps to Begin 2018

Northlake’s Market Cap model shifted from small cap to mid cap to start 2018.  The Style model still recommends growth although the underlying indicators shifted strongly toward value.  The new mid cap signal shifts the Style model from small cap growth to large growth since the Style model will only be in small cap mode if the Market Cap model is as well.  The new signals led to the following trades:  (1) sell the Russell 2000 (IWM) and reinvest in the S&P 400 Mid Cap (MDY), and (2) sell the Russell 2000 Growth (IWO) and buy the Russell 1000 Growth (IWF).

The Market Cap model saw two internal and one external indicator shift from small cap to large cap.  This was enough to move the overall model form small cap to mid cap.  There is not too much to read into the latest movements.  Most significantly, there remains a split between the internal and external indicators with the internals favoring small caps and the externals favoring large caps.  Whether another step change occurs to large cap will be dependent on the relative performance of small cap stocks over the next few months given the trend and technical internal indicators.

The Style model moved sharply in favor of value for January.  The single month reading actually is in value territory but the model works off two month averages in order to reduce signal volatility and smooth the data.  Remember that the models are attempting to capture long-term trends in market themes not month-to-month volatility.

The changes in favor of value were in both internal and external indicators.  External indicators now favor value as they pick up improving economic data.  Several internal indicators also moved toward value as investors are playing the beneficiaries of better GDP growth through more cyclical value stocks.

The latest signals did not work out that well on a relative basis as small caps lagged the gain in large caps over the last few months of the year.  Both models produced nicely positive returns as they did get a nice boost from the broad gains in the stock market.  One benefit of Northlake’s strategy is that a majority of client funds invested in stocks are in index-based ETFs allowing even less accurate signals to participate in market upside.

MDY and IWF 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.  IWM is used as a hedging vehicle in the Entermedia Fund.  Entermedia is along/short equity hedge fund managed and controlled by Steve Birenberg


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