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June 03, 2013

Another Month of Mid Cap and Value

There are no changes to the recommendations from Northlake’s Market Cap and Style models for June. The favored signals remain mid cap and value. As a result, all client positions tracking the models will be maintained for at least another month. Mid cap and value are represented in portfolios by the S&P 400 (MDY) and Russell 1000 Value (IWD), respectively.

There was some underlying movement in the factors that compose the models. In the Market Cap model two indicators moved in favor of small cap, while in the Style model one factor shifted toward value while another moved toward growth.

Advisory Service Sentiment and the Shape of the Yield Curve moved in favor of small capo in the Market Cap model. Advisory Service Sentiment reflects rising bullish sentiment among Wall Street forecasters. Rising bullishness is usually a leading indicator for small stock outperformance. This indicator shifts toward large caps if sentiment reaches an extreme and reverses. This might be something to watch if the recent downturn in the market continues through June.

The yield curve steepened in May as intermediate and long-term interest rates rose sharply to their highest level in many months. A steep yield curve (long-term rates higher than short-term rates) historically favors small caps as it is often an indicator of normalized economic growth. It will be interesting to see if that relationship holds this cycle given the extraordinary actions the Federal has taken that allow them to completely control short-term rates and keep them near 0%. This creates a natural bias toward yield curve steeping if long-term rates rise.

In the Style model, Insider Activity moved in favor of value, while the U.S. Dollar shifted toward growth. Insider Activity measures aggregate demand of insiders. Recently it has been falling and has now moved to a very low reading that coincides with better performance for value stocks. While the U.S. Dollar has recently been strong, the Style model measures it over a 12 month period. The dollar is less than 2% stronger than a year ago, a condition that historically favors growth stocks. A stable euro despite all the problems in Europe has kept the trade-weighted dollar form strengthening too much.

Last month the models put in a mixed performance. The new mid cap signal produced a rerun of approximately 1.8%, trialing the 2% gain for the S&P 500 and the 3% plus return for the Russell 2000. The Style model performed well with IWD up 2.7% better than S&P 500 and the Russell 1000 Growth (IWF), which gained 1.9%.

So far this year, the Style model is ahead of the S&P 500 producing a gain of about 16% against 14% for the market. The Market Cap model has struggled in 2013, up just 12%. As noted previously, the big gains in 2013 have not lead to the usual outperformance for small and mid cap stocks that is usually seen.

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

Posted by Steve Birenberg at June 3, 2013 10:56 AM in Models