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May 04, 2005
May Model Signals
The updated monthly signals from the market capitalization and style (growth vs. value) indicators showed no change for May. The models still favor large cap and value. Since these models are based on the weight of the evidence, I also look at the month to month trends in the strength of the signals and here there was some movement. The large cap signal got stronger and the value signal got weaker. In fact, the market cap signal moved firmly into large cap territory for the first time since the fall of 1998 while the style signal is barely hanging onto value and is at its weakest since the fall of 2003. These movements did not trigger trades this month in Northlake's ETF Plus strategy. Clients continue to own the S&P 500 Spyder (SPY) and Russell 1000 Value ETF (IWD)....
Review of April Signals
Last month, the market cap signal proved quite accurate, while the style signal had a neutral impact. For April, based on the exchange traded funds, the S&P 500 had a return -1.9%, the S&P 400 Mid Cap had a return of -3.7% and the Russell 2000 Small Cap had a return of -5.7%. April returns for the style ETFs were -2.3% for the Russell 1000 Value and -2.2% for the Russell 1000 Growth.
ETF Plus generally uses a fully invested strategy. The goal is to be in the area of the market that performs the best on a relative basis. If the market is falling, this means a good signal can be one in which losses are the smallest. For the Market Capitalization model, April was one of those months. ETF Plus is designed to limit losses in down markets and switch to the best performing areas of the market in up markets. If everything goes according to plan, as much capital as possible is preserved for periods when the market is rising leading to the best possible returns on an absolute and relative basis over long time periods.
Review of Market Capitalization Model Indicators
Looking more closely at the market cap signal, almost all of the more than a dozen indicators now are flashing a large cap signal. Here are the highlights (every condition favors large caps):
Review of Style Model Indicators
Switching to the style signal, the May signal is the third consecutive and sixth in the last seven to move toward growth. As noted above, the value signal is at its weakest since the fall of 1998. However, the signal is still value so client position's remain in the Russell 1000 Value ETF (IWD).
The weak value signal is the result of the style indicators being split evenly. Here is a brief summary of some of the indicators:
Favoring Value:
Favoring Growth:
Favoring Growth Just Barely:
As you can see, no clear signal emerges for either growth or value. In general, I think it is fair to say that a waning of economic strength has led to a shift toward growth but value is still in the game as long as the economy stays on a moderate growth track. Good investors never violate their discipline so as long as the style signal remains value, even weakly so, value is what is owned in client portfolios.
Posted by Steve Birenberg at May 4, 2005 03:49 PM in Models