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November 02, 2006
November 2006 Model Signals
Both Northlake's Market Cap and Style models sent new signals for November. The Market Cap model moved from large cap to mid cap and the Style Model went back to growth from value. The mid cap signal is fairly weak, while the growth signal is moderately strong. As a result of the new signal, I swapped all client and personal positions in the Russell 1000 Value (IWD) into the Russell 1000 Growth (IWF). Since the mid cap signal was weak I swapped only half of the positions in the S&P 500 (SPY) into the S&P 400 Mid Cap (MDY)....
The new mid cap signal follows a four month run where the model favored large caps. The prior call was a good one as SPY rose 8.26% for the period vs. 2.93% for MDY and 6.27% for the Russell 2000 (IWM). It is especially satisfying to have invested in the highest performing index when the signal is large cap. Looking back over the 25 years of history I have on the Market Cap model, bullish periods overwhelmingly had small cap signals. But don’t read that as a market call. Northlake's models are meant to predict relative performance, not market direction.
The new mid cap signal is the result of rebounding technical conditions for small cap indices over the last few months. There were no changes at all in the economic or interest indicators this month. Those remain fairly evenly split between large and small cap signals (the model kicks out a mid cap signal when the underlying factors are fairly evenly split between small cap and large cap signals).
The new growth signal is the second in the last three months following a long stretch of only value signals. The current growth signal is stronger than the September one that broke the 8 month streak in favor of value. It is also driven largely by the technical indicators but there is an unmistakable trend in the economic and interest indicators in favor of growth over the past six months.
I follow the models regardless of whether I agree with their signals but in this case I agree that the environment favors growth. In general, the models favor growth in a slowing economy when growth companies can presumably sustain better performance with less of a tailwind from the economy. Growth has been outperforming value since July. The one month shift from growth to value for October proved slightly inaccurate as IWD underperformed IWF by about 60 basis points.
Posted by Steve Birenberg at November 2, 2006 09:16 AM in Models
1.HOW LARGE A MARKET EFFECT[IF ANY] WILL RESULT FROM LAST EVENING'S SIZEABLE DEMOCRATIC VICTORY?
2.NTLI APPARENTLY HAD AN INCREASE IN LOSSES LAST QUARTER.DO YOU STILL THINK NTLI IS A REASONABLE VALUE PLAY?
Hi Mike:
I hope you surgery went well. Glad to see you back.
I think the Democrats won;t have muich impact on the market. Nothing that they pass that would be perceived as bad for business will get signed by Bush and their majorities will not be large enough to override a veto. In fact, I think the restoration of balance is a good thing and the mkt generally approves. There is now a check on Bush which would seem to reduce the odds of something drastic happening.
I found NTL's results to be mediocre but I don;t think they mean much for the near-term stock price. The company has about 9 months to show that the Virgin rebranding and other initiatives can drvie growth. The market will give them a pass for the next two quarters. Private equity could come back at any time or not. I am not a big fan of NTL because i think the competitive environment inthr UK is too tough even if they hit all their goals. Upside is low $30s vs. downside in low $20s. That is not a good enough risk-reward profile for me.
Posted by: Steve at November 8, 2006 10:13 AM