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July 02, 2008
July 2008 Model Signals
There were no changes again this month to Northlake's Market Cap and Style models. The signals continue to flash mid cap and growth. As a result, I am maintaining client and personal positions in the S&P 400 Mid Cap (MDY) and the Russell 1000 Growth (IWF) that are dedicated to this strategy.
Both signals weakened slightly this month but stayed firmly in their current recommendations. On RealMoney.com, two contributors who I greatly respect, Bob Marcin and Rev Shark, have been sharing their concerns about small and mid caps needing to catch up on the downside, especially as it relates to beta and risk aversion. However, one thing that goes unsaid in those comments is that there are some previously reliable indicators which are currently suggesting that now is a favorable environment for small and mid caps.
Unusually weak consumer confidence is a contrarian call favoring small caps. Weak coincident indicators are also consistent with future small cap outperformance in a contrarian sense. Historically wide credit spreads also have lined up with small cap outperformance in the past on a contrary basis. The current environment is unusual to say the least so the indicators may be off but not everything is lined up against small and mid caps.
And there are some indicators that clearly suggest caution toward small and mid caps....
....Rising interest rates are definitely a problem as is the recent weakening in market breadth and initial underperformance of small and mid caps. Dollar weakness also favors large caps although a lot of folks expect the dollar to strengthen.
On the Style side, the indicators remain mostly unchanged with the exception of forward earnings yields which now favor value. That is mostly due to the collapse in value stock prices on a relative basis over the past year. Cheap is not always good but it is worth noting that this indicator finally indicates we are in cheap territory.
Last month the models were accurate. Mid Caps fell 7.4% against an 8.6% decline for the S&P 500. Growth outperformed the S&P as well with IWF falling 6.9%. The Russell 1000 Value Index suffered again, declining 9.5%. The models have also been accurate over longer time frames as well. Growth has been favored since July 2007 during which IWF is down 7% and IWD is down 20%. Mid Cap has been in favor every month this year except April. For the year so far, the Market Cap model is off a bit over 6% while the S&P 500 is off almost 13%. I'm a believer in reversion to the mean so this run of good calls makes me nervous in the very short-term but these models have a great track record and I never try to out guess them.
As always, special thanks to Ned Davis Research who originally developed these models and continues to maintain them.
Posted by Steve Birenberg at July 2, 2008 09:22 AM in Models
THE OVERALL MARKET BROKE THE TRADING RANGE TO THE DOWNSIDE.THE NEXT TARGET ON A TECHNICAL BASIS IS A DOW OF 10,700.DESPITE THIS DROP,RECENT CALL/PUT RATIO ARE STILL GREATER THAN 1.5 AND THE VIX IS NOT MOVING UP DRAMATICALLY UP. IT DOES NOT APPEAR AS IF WE ARE NEAR A BOTTOM. CETV AND MICC ARE STILL GOING DOWN.THIS IS VERY WORRISOME
IS THERE ANYWAY TO USE PUTS AT THIS TIME TO MAINTAIN CAPITAL ? ONE WOULD LIKE TO SELL ON STRENTH BUT THE MARKET HAS BEEN GOING STEADILY DOWNWARD.DO YOU THINK IT IS TOO LATE TO BUY SHORT ETF'S AS A HEDGE IN THIS VERY DESTRUCTIVE MARKET?
IT APPEARS AS IF THERE WILL BE NO HELP FROM THE GOVERNMENT UNTIL A NEW ADMINISTRATION IS IN POWER.
DO YOU HAVE ANY THOUGHTS AS TO MINIMIZE THE DOWNSIDE IN THIS BEAR MARKET?
THE OVERALL MARKET BROKE THE TRADING RANGE TO THE DOWNSIDE.THE NEXT TARGET ON A TECHNICAL BASIS IS A DOW OF 10,700.DESPITE THIS DROP,RECENT CALL/PUT RATIO ARE STILL GREATER THAN 1.5 AND THE VIX IS NOT MOVING UP DRAMATICALLY UP. IT DOES NOT APPEAR AS IF WE ARE NEAR A BOTTOM. CETV AND MICC ARE STILL GOING DOWN.THIS IS VERY WORRISOME
IS THERE ANYWAY TO USE PUTS AT THIS TIME TO MAINTAIN CAPITAL ? ONE WOULD LIKE TO SELL ON STRENTH BUT THE MARKET HAS BEEN GOING STEADILY DOWNWARD.DO YOU THINK IT IS TOO LATE TO BUY SHORT ETF'S AS A HEDGE IN THIS VERY DESTRUCTIVE MARKET?
IT APPEARS AS IF THERE WILL BE NO HELP FROM THE GOVERNMENT UNTIL A NEW ADMINISTRATION IS IN POWER.
DO YOU HAVE ANY THOUGHTS AS TO MINIMIZE THE DOWNSIDE IN THIS BEAR MARKET?
If we don't rally in the last hour then we will have broken down. I base my observations on closing prices not intraday.
I don;t have much more to add. Puts are a good way to protect downside but the steady downward market has probably got put prices very expensive so if the insurance is unneeded the price will have been steep.
I think it is too late to buy short ETFs but you are much more bearish than I. If we keep going down it is never too late.
Honestly the best thing to do is be primarily in cash. Don't worry about effect timing as it is impossible. Since you can't time it perfectly keep core positions in your long-term favorites. CETV and MICC qualify.
Sorry to not have more insights but besides prices being lower not much has changed.
Posted by: Steve at July 7, 2008 02:08 PMCETV/MICC STOCKS WERE KILLED ALL WEEK . THE MARKET DROPPED LIKE A SAFE EARLIER TODAY.NOW,FANNIE AND FREDDIE WILL APPARENTLY BE ALLOWED AT THE DISCOUNT WINDOW.STOCKS HAVE TURNED AROUND MORE THAN 200 POINTS TODAY AND FINALLY HAVE GOTTEN INTO POSITIVE TERRITORY.. DO YOU THINK THIS COULD BE A TRADEABLE BOTTOM?
Posted by: mp at July 11, 2008 02:09 PMJust no way of knowing. We are getting whipped around this afternoon and the markets are thinner. Any good news and we rally big. Earnings start in earnest next week but that could cut both ways. I remain of the opinion that traders should be doing little and largely in cash while investors should just hunker down and remember that if they own good stocks the odds that their portfolios are wroth significantly more a year from now are very high.
Posted by: Steve at July 11, 2008 02:49 PMDESPITE GOOD NEWS THIS AM ON GOVERNMENT SUPPORT OF FANNIE AND FREDDIE,THE MARKET IS DOWN ;ALSO CETV AND MICC ARE DOWN BIG.WHEN WILL THE MARKET EVER GO BACK TO FUNDAMENTALS? THE MARKET AT PRESENT IS GETTING RID OF THE BABY WITH THE BATH WATER.CETV AND MICC HAVE VERY LITTLE CREDIT EXPOSURE OR EXPOSURE TO ENERGY ISSUES.GOOD STOCKS GO DOWN WITH BAD ONES
Posted by: MP at July 14, 2008 02:34 PMDESPITE GOOD NEWS THIS AM ON GOVERNMENT SUPPORT OF FANNIE AND FREDDIE,THE MARKET IS DOWN ;ALSO CETV AND MICC ARE DOWN BIG.WHEN WILL THE MARKET EVER GO BACK TO FUNDAMENTALS? THE MARKET AT PRESENT IS GETTING RID OF THE BABY WITH THE BATH WATER.CETV AND MICC HAVE VERY LITTLE CREDIT EXPOSURE OR EXPOSURE TO ENERGY ISSUES.GOOD STOCKS GO DOWN WITH BAD ONES
Posted by: MP at July 14, 2008 02:35 PMI was traveling the last two days so sorryf or the slow response.
Sentiment and momentum alwasy overwhelms fundamentals. And when the fundamentals beign to be question ed on a macro basis, and in this case global, investor confidence in fundamentals weakens. those things are happening to CETV and MICC and many other companies right now. There is nothing we can do about it except to make sure our own investments are correctly aligned for the risk we are will to take. I remain very confident that both these stocks will be much higher in the next six to twelve months but if the market remains under pressure these stocks will not rally against the major trend.
As for the market, it will go back to fundamentals when it corrects to the right level and macro fundamentals stabilize. Figuring out when that will happen is the hard part. I think it could happen over the balance of 2008.
Posted by: Steve at July 16, 2008 08:33 AM