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April 02, 2008

April 2008 Model Signals

Northlake's Market Cap model shifted from Mid Cap to Large Cap for April. As a result, I sold all client positions in the S&P 400 ETF (MDY) and swapped into the S&P 500 Spyder (SPY).

The underlying indicators in the model were unchanged. This shift occurred because the model is based on two-month smoothing and the fresh reading slightly favored large cap replacing the dropped month which slightly favored mid cap. The model could easily shift back next month as the two month average is now composed of two readings that barely edge into large cap territory. Of the ten factors in the model, five favor large cap, four favor small cap, and one is neutral. A mixed group of indicators leads to a mid cap signal.

The Style model remains firmly in Growth territory as it has since last July. Six of the nine indicators favor growth. The latest factor to move in favor of growth is the trend indicators. These indicators measure relative strength of growth vs. value over two, nine, and twelve month time frames. In general, the Style model continues to favor growth because it is picking up slower economic activity, a weak dollar, and a normally shaped yield curve....

....The Mid Cap signal that just expired was in place for three months. It was a decent signal as MDY outperformed SPY by a little less than 1% during this period. Given that the stock market declined by about 10% during the first quarter I am pleased that mid caps did so well as the beta effect might have suggested that mid caps would lag.

The Growth signal lagged a bit in 1Q08, as my preferred tracking vehicle, the Russell 1000 Growth (IWF), underperformed the Russell 1000 Value (IWD) by slightly less than 2%. Almost all of the gain for value came in January when financial stocks responded favorably to the first aggressive moves by the Fed. Given the heavy weighting for financials in the value indices, the fact that value slightly outperformed growth in 1Q is a bit surprising. Since it went into place last July, the growth signal has been superb, produced a return more than 7% better than value.

I would not read too much into recent price trends among differing indices. There was very little variance among index returns in the US in 1Q as the market decline fairly evenly decimated all styles, sectors, and market caps.

Posted by Steve Birenberg at April 2, 2008 05:16 PM in Models