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February 03, 2008

February 2008 Model Signals

There were no changes to Northlake's Market Cap and Style models for February. The Market Cap model continues to flash a mid cap signal while the Style model remains in growth mode. As always, thanks to Ned Davis Research who originally developed and continues to maintain these models.

The Market Cap model swung to mid cap for January after an 11 month run at large cap and remains at mid cap for February. There was absolutely no movement in the underlying factors for February leaving the model with what I classify as a weak mid cap signal. The Market Cap model is picking up conflicting signals on the economy and interest rate trends that are beginning to favor small caps but have yet to be confirmed by the technical indicators. Falling rates and bearish sentiment extremes favor small caps but slowing economic growth and the weak dollar favor large caps. The model defaults to mid cap in this situation.

The Style model remains in growth mode but the underlying indicators made a significant move in the direction of value for February. The one month reading is right on the borderline between growth and value but the two month smoothed reading is still probably deep enough in growth mode to give growth at least another month. The only big shift in an underlying factor was in the trend indicators which shifted to value after value massively outperformed growth in January. The value signal generated by rapidly rising and now well above historic level credit spreads also has contributed to the shift in favor of value.

The January signals offered a mixed performance picture....

....The mid cap call was neutral as both the S&P 400 Mid Cap and S&P 500 fell by about 6%. For most of the month, the S&P 500 was easily beating the S&P 400 Mid Cap but in last week's rally the S&P 400 along with the Russell 2000 easily beat the S&P 500. The growth call was poor in January with the Russell 1000 Growth ETF (IWF) falling by 8% against a 4% decline for the Russell 1000 Value ETF (IWD). Weak tech stocks and rebound in financials in conjunction with the Fed easing caused the divergent performance. The growth signal has been in place since June 1st and remains a very good call. Since June 1st, IWF has fallen 5.5% vs. a decline of 11.7% for IWD.

Posted by Steve Birenberg at February 3, 2008 02:37 PM in Models