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May 01, 2008
May 2008 Model Signals
Fresh signals from Northlake's Market Cap and Style models are in. The Market Cap signal swung back to Mid Cap for May, while the Style signal remains Growth as it has been since last July. As a result of the new signals, I sold all positions in the S&P 500 (SPY) dedicated to this strategy and used the proceeds to buy the S&P Mid Cap 400 (MDY). I continue to hold client positions in the Russell 1000 Growth (IWF) which is reflection of the Growth signal.
The Market Cap model has been fluctuating between Mid Cap and Large Cap for the last three months. The current signal is a bit stronger in favor of Mid Cap than the one form February. I suspect it will hold for at least another month. The sfit to Mid Cap came about as three of the underling factors moved from large cap to small cap while just one factor flipped the other way. As a reminder, this model is composed of ten factors which I breakdown among economic, interest rate, and technical indicators. Each indicator sends a monthly signal in favor of either small cap or large cap. An overall Mid Cap signals is sent when it is a split decision as is the case for May....
....The indicators that flipped in favor of small cap this month include sentiment, breadth, and coincident indicators. The sentiment indicator is picking up the extreme bearish sentiment reading form a month ago that has now reversed off its low. The breadth indicator is picking up better action in small and mid caps during April. The coincident indicator is making a contrarian call that economic growth has slowed to the point that the next move will be up. That is usually a good time to own small caps.
While the Style model stayed in growth territory, it did show some movement in favor value as one indicator shifted from growth to value. The yield curve has now gotten so unusually steep that it is in a range where value stocks have outperformed. Value has history of outperforming growth when the yield curve is unusually steep or unusually flat.
Last Month's brief shift from Mid Cap to Large Cap turned out to be a bad call. During April, MDY rose over almost 8% while SPY gained just under 5%. Large Caps did slightly outperform small caps which gained 4.6% as measured by the Russell 1000 ETF (IWM).
The growth signal worked out better in April with IWF gaining a little over 5%, while the Russell 1000 Value (IWD) gained 4.7%. Small cap growth performed even better, gaining 5.8% against 3.9% for small cap value using the Russell 2000 Growth and Value indices, IWO and IWN, respectively. Since the growth signal went into effect in July 2007 it has been very accurate: IWF is down 3% while IWD is down 10.7%. The gap between small cap growth and value is similar.
As always, special thanks to Ned Davis Research who developed these models and continues to maintain them.
Posted by Steve Birenberg at May 1, 2008 02:13 PM in Models
1.THE OVERALL MARKET GOT NEAR 1410 AND ENDED ABOVE THE PREVIOUS BARRIER OF1400.THE NEXT TARGET FOR THE S AND P WILL BE THE 200 DAY MOVING AVERAGE AT 1430 APPROX.
2.P STEPANEK IS QUESTIONING CETV'S LARGE COURT VICTORY IN THE PAST IN EUROPEAN COURTS.WOULD THERE BE ANY LIKELY ADVERSE REPERCUSSIONS TO HIS ACTIONS?
3.MICC AND CETV SO FAR HAVE HAD EXCELLENT WEEKS.
1. I think a breakout is possible but I do't think it will last. Today's employment report could have a big impact. I'd sell this breakout if I were a trader and it occurs.
2. Who is P Stepanek and what is he saying. As far as I know there is no appeal in this case which was settled in 2001. I have NEVER heard anything about a possible reversal.
3. Yes, both will pull back if the market suffers but both should do better pn the next pullback now that earnings estimates for 2008 are significantly higher.
Posted by: Steve at May 2, 2008 06:56 AM1.You were correct to recommend selling a rally on good job data.
2.What I find very frustrating is that the market appears to be controlled by traders who buy or sell on momentum and technicals and not on fundamentals.
3 For example ,micc had a superior earnings report this quarter.True value in a bad market is probably in the range of $115 to 130.In a good market ,the stock should be worth $130 to even $200.Everytime the stock moves up,no matter how strongly,it pulls back at approx.$116.DESPITE THE OUTSTANDING EARNINGS,MICC pulled back again this week at approx.$115 to 116.
4.When do you feel that stocks will start reflecting fundamentals and their true value.Do you still feel we are in a trading range,albeit somewhat higher,and can still expect this strong resistance levels in growth stocks?
5 .Do you believe that this unpleasant stock action is only the transient result of the recesion /credit crunch-or do you feel it is at least partially reflective of a more permanent
shift in market mechanics due to hedge funds/agressive traders/computer driven protocols/change in sec regulations etc? To an amateur like me,it seems as if the day of"buy and hold"is dead and that, more often than not,one should sell on any large rally.
6.CETV and MICC did have very oustanding reports this quarter.
7.The shift from gold and commodities to stocks probably reflects some optimism in the improvement in the overall market and some loss of gold/commodities momentum traders.Hoever,with continue rise in inflation.one feels that it is unlikely that the gold and commodites play is completely dead.What are your thoughts in this regard?
1. Despite the pullback from Friday's highs I am not certain that the pop to 1425 was the ST peak. I think we could move up again before we get a 3-5% pullback. But thanks for the compliment!
2. Futures traders have been controlling the short-term for along time. It is just more frustrating now because the trend has been down. Nothing you can do about this so just try to ignore it and remember that ultimately value on individual stocks is realized. You just have to be patient. For example, I've owned CETV since 2001. Plenty of bad times for the stock since then but I've been patient.
3. $116 is resistance. If they keep hitting their numbers it will get through and go higher but a stock like MICC needs an upward trending market to really move to a new level.
4. I am beginning to think that we are in a long period of well below par economic growth but not a severe recession. If this is the case it may be awhile before resistance is finally overcome.
5. Buy and hold still works fine but the volatility today is much higher so it is amore painful strategy. It is still the strategy I follow. I think too much emphais is placed on traders. It is still fundamentals that decide the ultimate direction.
6. All is well in CETV and MICC land. Let's just get more good quarters and a better market.
7. I think the gold/ag/commodities trade is way over owned and due for a big pullback. It could get real ugly much in the way CETV, MICC, APPL, and GOOG pulled back so hard in 1Q08 when the momentum traders left those names.
1.THANK YOU FOR YOUR INPUT.HOWEVER,I STILL FIND THIS MARKET VERY IRRITATING AND FRUSTRATING.
2. THE DOW KEEPS BREAKING BELOW 13,000;THE S AND P
DROPS BELOW 1410 WITHOUT MUCH LOGIC.
3.TRADERS AND TECHNICALS CONTROL THE DAY.