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September 02, 2005

September Model Signals

After getting fresh signals from Northlake's monthly models, client holdings in the Russell 2000 Small Cap ETF (IWM) were swapped into the S&P 400 Mid Cap ETF (MDY) at the open of trading yesterday. This trade was triggered mainly by the technical factors in the Market Cap Model. No changes were made based on the Style model, which continues to flash a growth signal that got stronger with the fresh data from August....

....The small cap signal for August was a weak one and turned out to be inaccurate as well. Northlake's goal is to have client assets in the best performing market cap class each month among small, mid, and large cap. In August, the Russell 2000 fell about 2%, twice the decline of the S&P 500 and S&P 400. The models were whipsawed during August as the strong market breadth in the July rally that shifted the model from mid cap to small cap reversed in August. Breadth (advances minus declines) usually is a leading indicator but it didn't work last month. The weak breadth in August shifted the model back to mid cap mode for September and triggered the trade.

The style model has been flashing a growth signal since June. The fresh signal for September is the strongest yet with the model picking up decelerating economic growth as measured by the coincident indicator of economic growth. Growth stocks make sense in a modest or slower growth environment as presumably they don’t need the tailwind of economic growth to continue to produce earnings growth. The style model shifted from value to growth in June for the first time since the fall of 2003. So far, the call has been good with growth outperforming value (measured by calculating the average return of the Russell 1000 and 2000 growth and value ETFs). The models work best when the signals are strong and while the growth signal is solid, it is not yet showing a reading consistent with the strongest historical performance.

In summary, within the actively managed ETF portion of client portfolios, the holdings are now the S&P 400 Mid Cap ETF (MDY), the Russell 1000 Growth ETF (IWF), and the Russell 2000 Growth ETF (IWO).

Posted by Steve Birenberg at September 2, 2005 08:52 AM in Models