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December 05, 2011

December Sticks With Mid Cap and Growth

Mid Cap and Growth continue to be the favored themes at Northlake Capital Management, LLC. The latest model signals for December showed some underlying but not enough to shift the signals. As a result, for at least another month, Northlake clients using the models will continue to own the S&P 400 Mid Cap (MDY) and the Russell 1000 Growth (IWF).

Looking at the individual factors underlying each model, there was some movement in favor of large caps and growth. The Market Cap model saw the breadth factor shift in favor of large cap. This reflects large cap stocks performing than better than small cap stocks over the past six months. The shift in this one factor still leaves the model solidly in mid cap territory but if another factor shifted toward large cap next month a change is possible.
In the Style model, there was also one factor shifting its signal this month. Advisory Service Sentiment moved to Growth from Value reflecting less bullish sentiment among investment professionals. In the case of the Style model, the movement was in the direction of the current signal, so the Growth signal is now stronger and in territory where it is likely to stay in place for at least a couple of more months.

The current signals have a bullish bias such that they should prove accurate if the market continues its recent rally through year end. With some more hopeful signs in Europe and continued good data on the U.S. economy, a yearend rally seems plausible. The potential fly in the ointment for the models is that any rally could be led by financial stocks which are highly sensitive to developments in Europe and include in Value. The rally that began last week has, in fact, been led by financial stocks with technology, a major component of Growth, lagging the market’s gains. In a bullish environment, technology should catch up if history is any guide.

The models put in a good performance in November although the gains over the benchmark S&P 500 were minor. The Mid Cap signal saw MDY down just ¼ of 1% against a drop of almost ½ of 1% for the S&P 500. The Growth signal did a little better with IWF falling just 1/10th of 1%.

Since the current signals were put in place the performance has been mixed. Growth has done well, down about 3% vs. a drop of over 4% for the Value. The Mid Cap signal has been off with MDY down over 2% against a drop of less than 1% for the S&P 500. Mid Cap has easily beaten Small Cap with the Russell 2000 (IWM) dropping almost 6%.

Disclosure: MDY and IWF are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor. SPY and IWM are net short positions in the Entermedia Funds. The Entermedia Funds are long/short equity hedge funds focused on media, entertainment, communications, and related technologies. Steve is co-portfolio manager of Entermedia, owns a stake in Entermedia’s investment management company, and has personal monies invested in the Funds.

Posted by Steve Birenberg at December 5, 2011 11:22 AM in Models