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November 05, 2004
November Model Signals
There were no changes to Northlake's model signals for November. The Market Capitalization Model continues to favor Mid Caps and the Style Model continues to favor Value. There was some movement toward Small Caps in the Market Capitalization model (but not enough to switch the signal), leaving it on the cusp of a shift from Mid Cap to Small Cap. For now, client accounts remain invested in the S&P 400 Mid Cap Index....
As a reminder, in general, sustainable economic growth and low interest rates favor small and mid size companies and value stocks. Economic growth and low interest rates make it easier for smaller companies to grow earnings and finance future growth initiatives. Economic growth and low interest rates also favor Value stocks, which are generally in traditional cyclical industries like materials and manufacturing.
Key to the historical success of the Models is that is that the factors are designed to change their signals at extremes. This allows the signals to stay in place for most of the trend, while also recognizing that an extreme reading generally means the next move is in the opposite direction. For example, if economic growth statistics are too strong, the models anticipate that the next move is likely a slowing in economic growth meaning Wall Street will favor safer, lower volatility stocks. On Wall Street, this would be large cap and value stocks. On the other hand, if economic growth statistics were very weak, the models anticipate that the next move is likely a pickup in growth. Historically, when economic growth accelerates from low levels a bull market begins favoring small sap and growth stocks due to their higher volatility.
For now, the models are assuming that economic growth and interest rates will continue in a zone favoring a decent but not fantastic economic environment. This is consistent with my view and suggests that corporate earnings growth will be strong enough to support higher stock prices in the months ahead.
Posted by Steve Birenberg at November 5, 2004 08:16 AM
Hey Steve,
Interesting column again Steve and I agree with you that we are in for an economic environment that is "pretty good" but not perfect. That being said, outside of a few industries/sectors -in my opinion those being large pharma and semi's - there is some definite upside here going into the end of the year, 1H05. I was wondering what sectors you were bullish on... and what effect you think the continued strength in corporate optimism is going to have on the market and do you expect it to continue?
