Northlake’s Style model moved to a neutral reading for February, showing no favoritism for growth vs. value. This change leads to the sale of one half of client positions in the Russell 1000 Growth (IWF) with proceeds reinvested into the Russell 1000 Value (IWD). IWF and IWD are now equal position sizes in client accounts. There is no change to the mid cap signal from the Market Cap model, so client positions in the S&P 400 Mid Cap (MDY) will remain for the second consecutive months following January’s shift from small cap to mid cap.
The neutral reading in the Style model comes after four consecutive months at a growth signal. There was very little change in the underlying indicators. The change to neutral occurred because the models purposefully use two month averages to smooth volatility and reduce false signals. In other words, the standalone January Style model reading was neutral but the model stayed at growth due to a strong growth reading from December. The February reading dropped the December growth number and now picks up neutral single month readings for January and February. We explain this to reiterate that the models are not designed to capture every month perfectly. We are looking to capture multi-month or multi-quarter trends in the growth/value and small/mid/large cap themes. Using two month averages helps to insure that a trend is in place since the underlying indicators can be individually quite volatile and many are only reported or recorded once a month.
The shift from strong growth readings in November and December to neutral readings in January and February reflects economic data and market trends focused on improving growth for the U.S. economy. Hard economic data has improved and investors are assuming more to come based mostly on the tax cuts and secondarily on reduced regulation.
The Market Cap model was pretty stable from January to February leaving the mid cap signal solidly in place. There continues to be a split with the internal indicators favoring small cap and the external indicators recommending large cap. The internal indicators reflect the recent market rally and excellent market breadth, while the external indicators are focused on solid and improving economic growth offset by rising interest rates.
MDY, IWD, 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.