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July 04, 2005

July Model Signals

Fresh signals for July for the Market Capitalization and Style models led to some trades in clients accounts on July 1st. The Market Cap model shifted from a weak large cap signal to a solid mid cap signal for July while the Style model moved firmly into growth territory for the first time since the fall of 2003. As a result of the new signals, positions in the S&P 500 were replaced by the S&P 400 Mid Cap Index. Additionally, half of the holdings in the Russell 1000 Growth Index were swapped into the Russell 2000 Growth Index. This trade gives portfolios exposure to smaller companies to take advantage of the new Mid Cap signal....

....The shift from large cap to mid cap in the Market Capitalization model is a function of recent strengthening in the U.S. dollar and the rally in bond prices that have led to lower interest rates. Each of these factors favors small and mid size companies in terms of relative performance based upon historical performance. Both shifts are logical as dollar strength hurts large cap companies who get significant sales overseas and lower interest rates support broad based economic strength which helps profits at smaller companies.

The technical indicators in the Market Capitalization also shifted from toward smaller companies due to improved performance for small and mid cap indices in June. The technical indicators are the only short-term factors used in the model and are designed to catch just such a move. Effectively, the technical indicators allow the model to respect the market action and the fact that stock prices anticipate future trends.

There were no major changes that led to stronger growth signal from the Style model. Rather, a number of factors moved slightly in favor of growth and pushed the signal a little deeper into growth territory. Given some signs that economic growth may be slowing, growth companies should gain investor attention as they can produce improved profits without a big tailwind from the economy.

Posted by Steve Birenberg at July 4, 2005 09:20 PM in Models