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March 01, 2007

March 2007 Model Signals

There were no changes to Northlake's Market Cap or Style models for March. The signals remain Large Cap and Value. As a result in the portion of client portfolios dedicated to Northlake's ETF rotation strategy (generally ranging from 40% to 80% of equity portfolio value depending on account characteristics), I continue to own the S&P 500 (SPY) and the Russell 1000 Value (IWD).

Despite the lack of changes in the signal, there is one notable item when looking at the factors underlying the model. The current reading in favor of large caps is one of the two strongest signals since a five year run in favor of small and caps ended in 2005. Since then the model has rotated between mid cap and large cap with more recent data trending generally toward large caps.....

The Market Cap model contains ten factors that I classify as economic, interest rate, or stock market indicators. Presently nine of these factors large caps. Some of the factors are sending stronger large signals than others but the message is clear.

The Style model had few changes for March. The signal in favor of value is a little stronger but I would not classify as a strong signal. It could easily flip back to growth next month if just one or two factors changed.

I am uncertain whether this week's sharp stock market decline is the beginning of a bearish or just part of a stiff short-term correction. However, one thing I think we can for certain is that for awhile volatility is likely to be greater and the downside risk has increased. In this type of environment I am pleased that the Market Cap model is sending a strong large cap signal. As a long only manager/fully invested manager, the best way I can protect my clients assets is to own less risky assets when risks to the downside are highest. I feel the current position of the models is closely aligned with the new market environment. I can’t ask for much more than that whether the signals turn out right or wrong.

Posted by Steve Birenberg at March 1, 2007 04:42 PM in Models