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January 04, 2005

January Model Signals

Happy New Year to Northlake Clients and Friends!

Over the weekend, Northlake received the latest signals from its market capitalization and style models incorporating the latest economic, interest rate, and stock market indicators. There were no major changes as the the signals remain Mid Cap and Value. However, there is some underlying movement that is leading to client trading activity....

As of 12/31/04, most clients held 100% of their style investment (growth or value) in the Russell 2000 Value exchange traded fund (Ticker: IWN) (the Russell 2000 is the benchmark index representing small cap stocks). The market cap model still is favoring mid caps but the components have shifted toward large cap for two months running. With the market cap signal mixed but leaning large, half of the funds held in IWN were shifted to the Russell 1000 Value exchange traded fund (Ticker: IWD) in trading on January 3, 2005 (the Russell 1000 is similar to the S&P 500 and represents large cap stocks). Thus, clients now have a balanced exposure to the entire spectrum of value stocks rather than a concentrated exposure to small cap value stocks. This trade reduces the risk profile of client accounts because large cap stocks are less volatile than small cap stocks.

Small cap stocks have outperformed large cap stocks every year since 1999. Many commentators expect this trend to reverse in 2005. Northlake's indicators suggest a shift is possible with recently stable interest rates, a flatter yield curve, and narrow credit spreads for corporate bond issuers being the primary indicators that have moved from favoring small caps to large caps. Northlake's models have excellent long-term records and we never outguess them, so despite the lean toward large cap, for now, Northlake clients remain invested in the S&P 400 Mid Cap exchange traded fund (Ticker: MDY), providing middle of the road exposure in terms of market cap.

In summary, for January, market cap exposure is 100% invested in the S&P 400 Mid Cap (MDY) and style exposure is now split evenly across the entire range of value investments with half held in the Russell 1000 Value index (IWD) and half in the Russell 2000 Value index (IWN).

Posted by Steve Birenberg at January 4, 2005 11:39 AM in Models