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May 02, 2006

May 2006 Model Signals

There were no changes to signals from Northlake's Market Cap or Style models for May, which continue to flash Mid Cap and Value. Consequently, the positions used to implement these signals are also unchanged: S&P 400 Mid Cap (MDY) and Russell 1000 Value (IWD) and Russell 2000 Value (IWN). The default position of $3 in IWD for every $1 in IWN is also being maintained.

While the market cap signal did not shift, there was movement in underlying factors that pushed the signal toward a large cap reading.....

In fact, the current reading of the market cap model is closer to a large cap signal than it has been since January 2006, although I am probably overanalyzing it. The only factor to shift was NYSE Breadth, which shifted from a small cap to a large cap signal due to deteriorating breadth as measured by the monthly average of weekly NYSE advances minus declines. This measure of breadth has deteriorated sharply in recent weeks. As mentioned, I am probably reading too much into these small moves but there has been awful lot of discussion on Wall Street about whether large caps will reassert leadership so I thought I would bring it to your attention.

There is absolutely nothing new from the Style model. The signal has now remained firmly in value territory for four consecutive months.

Last month, the mid cap and value signals worked out pretty well. MDY matched the performance of the S&P 500 despite the fact that the small cap Russell 2000 lagged. Usually, the higher volatility on MDY will cause it to move more in tandem with the Russell than the S&P 500. However, I've noticed a high correlation on daily relative performance between the energy stocks and MDY. I think this is because even though MDY is not heavily weighted in energy, it does contain more of the high octane energy stocks.

Value led growth last month, especially in the larger cap areas. IWD easily beat the Russell 1000 Growth (IWF) as the large cap energy and financial exposure in IWD boosted that ETF while IWO suffered as large cap tech like Microsoft (MSFT) and Intel (INTC) performed poorly.

The signals have also been accurate since the most recent changes took place. Mid caps have easily outperformed the S&P 500 since last September when the latest mid cap call occurred. The value signal has been in place for just three months. It has proven slightly accurate but my implementation of $3 IWD for $1 IWN has given the return a boost.

Posted by Steve Birenberg at May 2, 2006 02:10 PM in Models