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May 03, 2009

May Model Signals Still Favor Small Cap and Growth

There are no changes to Northlake's Market Cap and Style models for May. The signals continue to recommend small caps and growth. As a result, I will maintain positions in the Russell 2000 (IWM) and the Russell 1000 Growth (IWF).

There was no movement in the underlying factors of the Market Cap model. Eight of the ten factors continue to favor small caps with only valuation and bond momentum signaling large cap. The small cap signal actually got a bit stronger this month so much so that is certain to stay small cap at least another month (the current signal uses two month smoothing). The added signal strength emanates from the trend indicators which reflect April's incredible relative strength in small caps.

The Style model's growth signal weakened a little for May but looks strong enough to last another month at least. The trend indicators flipped from favoring growth to neutral reflecting a month where growth and value indices had similar performance.

The small cap signal worked very well in April as IWM gained 15.4%, easily outdistancing the S&P 500. Year-to-date, IWM has now outperformed the S&P 500, as measured by SPY, by 166 basis points. The small cap signal has been in place since 9/1/08. Thanks to the great month in April, underperformance since September 1st is down to just 320 basis points. The small cap signal clearly was early and the unusual market conditions kept it inaccurate for many months. However, as market and economic conditions have stabilized the overwhelming message from the economic, interest rate, stock market, and technical indicators that compose the model is that small caps are poised to outperform.

The Style model provided little value added in April but did no damage either. Value slightly outperformed growth with the Russell 1000 Value (IWD) rising 10.6%, 50 basis points more than IWF. Small cap value (IWN) also outperformed small cap growth but by just 60 basis points. The Style model has been recommending growth since February 1st and it has been an accurate signal so far with IWF up 9.9% to just 2.9% for IWD.

As always, thanks to Ned Davis Research which originally developed the Market Cap and Style models and back tested and adapted them for the use of Northlake Capital Management, LLC.

Disclosure: IWM, IWF, and SPY are widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg's personal accounts.

Posted by Steve Birenberg at May 3, 2009 12:32 PM in Models