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June 02, 2005

June Model Signals

Due to a slowing but still growing economy and a decisive turn in the intermediate-trend indicators, the model Northlake uses to allocate between growth and value ETFs shifted from value to growth for June. This is the first monthly signal favoring growth since October 2003! The market cap model had no change for June and continues to favor large caps. As a result of the new growth signal and the ongoing large cap signal, at the open on Wednesday, all client positions in the Russell 1000 Value ETF (IWD) were sold and replaced with new positions in the Russell 1000 Growth ETF (IWF)....

Slower Economic Growth Favors Growth Stocks

Slower economic growth favors growth stocks because presumably they can generate earnings gains with less help from an economic tailwind. Sharp outperformance of growth over value in May confirmed the economic indicators and shifted the trend indicators. In fact, in May, the Russell 3000 Growth ETF (IWZ) gained 5.0% against a gain of 2.9% for the Russell 3000 Value ETF. This was the first decisive month of performance favoring growth in at least a year and came on the heels of 1300 basis points of cumulative outperformance for value in the 11 months ended April 2005 and 500 basis points cumulative outperformance for value over the seven months ended April 2005.

Fundamental, Technical Analysis Working Together

The fact that the trend indicators shifted and caused a change in the model signal is a good example of fundamental and technical analysis working together. Trend indicators play an equally important role to economic and interest-rate indicators in the model specifically to try to make sure you don't arrive too early or leave too late. No model will have perfect timing but combining technical and fundamental indicators hopefully helps to make sure you get most of the major trend right.

No Change to Market-Cap Model

There was no change to the market-cap model for June, which continues to favor Large Cap. In May, the large-cap signal was inaccurate as the S&P 500 Spyder (SPY) gained 3.2%, underperforming both the S&P 400 Mid Cap (MDY: +5.7%) and the Russell 2000 (IWM: +6.5%). The relative gains for small- and mid-cap more than reversed the April outperformance of large-caps when the market produced significant negative returns across the board. The June large-cap signal is pretty stable compared to May, making it three straight months favoring large-cap for the first time since the fourth quarter of 1998. Given the massive outperformance for small-caps over the last five years, this could be a sign that the much debated shift to large-caps is finally underway.

Posted by Steve Birenberg at June 2, 2005 11:26 AM in Models