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October 01, 2007

October 2007 Model Signals

There are no changes to the signals from Northlake's Market Cap and Style models for October. The market cap model continues to flash a strong signal in favor of large cap outperformance. The style model is now flashing its strongest signal since the late 1999/early 2000 market peak for growth stocks. To capitalize on the signals, I continue to own the S&P 500 (SPY) and the Russell 1000 Growth (IWF) in client and personal accounts.

The market cap model did undergo a slight shift toward small caps as two of the ten factors went form a large cap signal to a small cap signal. Advisory Service Sentiment got extremely negative and then turned up in the past two months. This is normally bullish for small caps. In addition, consumer confidence has fallen to a level that favors small caps. This is a contrarian indicator. The concept is that low consumer confidence leads to the next move by the Fed or in the economy being favorable to investors. If so, why not own beta. Low and falling consumer confidence also often leads to falling interest rates. Falling interest rates are one of the strongest indicators of small cap outperformance. I still expect the large cap signal to hold for another month or two at least but the model suggests that outperformance of large caps may moderate.

And large caps have been outperforming. Since the current large cap signal went into place on February 1st, SPY is up 6% while the Russell 2000 as measured by IWM is up less than 1%. In the third quarter, SPY rose 1.5% while IWM fell over 3%. Even as the market rallied sharply in September, SPY was king, rising 3.4% vs. 1.6% for IWM.

As mentioned the Style model now has its strongest reading and its longest string of growth readings since the period from August 1999 though March 2000. The only change to the underlying factors for October was a shift in the insider activity indicator from value to neutral.

Since growth signal went into place in June, the Russell 1000 Growth (IWF) is up over 4% vs. a loss of almost 1% for the Russell 1000 Value (IWD).....

...In small cap style indices, it is also firmly growth over value although the Russell 2000 Growth (IWO) is down about 1%, but that looks good next to an almost 7% loss for the Russell 2000 Value (IWN). For September both growth indices decisively outperformed their value counterparts.

Posted by Steve Birenberg at October 1, 2007 03:10 PM in Models