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November 02, 2012

Back to Mid Cap...But Will It Last?

After spending two months at large cap, Northlake’s Market Cap model shifted to mid cap for November. There were no significant changes in the underlying factors in the models. Rather, there was just movement within each model that led to a small change in the overall model reading. Since the large cap signal was not a strong one, the small changes due to fresh data from a month of economic reports and stock market trading was enough to change the signal to mid cap.

As I have explained in the past, volatility in the model signals often picks up when a larger trend is underway. I think a larger trend favoring large caps might be coming after a run of almost twelve years for small and mid cap since the dotcom bubble burst. The idea behind this switch is that the sluggish, post financial crisis, global economy is easier to navigate for larger companies. In addition, investors would gravitate to the perceived safety, stability, and predictability of larger companies. It is not yet clear that a major large cap trend is underway but conceptually, it makes a lot of sense.

The Style model was unchanged, registering its fourth consecutive month at value. The value signal got a little stronger this month as recent dollar strength favors value. Growth stocks tend to have more international exposure and do better when the dollar is weak.

As a result of this month’s signals, client positions in the S&P 500 (SPY) were sold with the proceeds reinvested into the S&P 400 Mid Cap (MDY). The prior large cap signal was not a difference maker as for the two month period it was in place the S&P 500, S&P 400, and Russell 2000 each less than 1%. The relatively new value signal is performing well, with the Russell 1000 Value (IWD) up over 4% versus a gain of over 1% for the Russell 1000 Growth (IWF) since the value signal was triggered at the start of August.

Disclosure: IWD and MDY are widely held by clients of Northlake Capital Management, including in Steve Birenberg’s personal accounts. SPY is held in selected Northlake-managed accounts. Steve Birenberg is sole proprietor of Northlake, a registered investment advisor. Regulatory filings can be found at www.sec.gov.

Posted by Steve Birenberg at November 2, 2012 09:21 AM in Models