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April 01, 2014

Back to Value After a False Start with Growth

Northlake’s Style model shifted from growth to value for April. As a result, client positions in the Russell 1000 Growth index (IWF) have been sold with proceeds reinvested in the Russell 1000 Value index (IWD). There is no change in the recommendation from the Market Cap model which continues to recommend mid cap. Client positions in the S&P 400 Mid Cap index will be held for at least another month.

The shift back to value in the Style model came after just one month. It was driven mostly by the trend indicators which moved from growth to value following material outperformance by value during March. From March 7th thru month end, growth stocks pulled back sharply as investors rotated to recently lagging industry sectors and booked profits in the big winners from 2013 and early 2014. Also supporting the shift to value was insider trading activity. This factor actually is picking remarkably low net insider buying, something that in the past has accompanied periods of large gains for value stocks and large losses for growth stocks. The overall model seems likely to stay in value mode for more than a month given a rather shift across the underlying factors.

The Market Cap model saw a lot less movement in its underlying factors. The recommendation stayed at mid cap but the shift of the bond momentum factor from large cap to small cap leaves the overall model close to recommending small caps. Bond momentum measures the three month rate of change in long-term interest rates. Rates have been falling recently as fears surrounding tapering of the Federal Reserve’s quantitative easing policy have receded. Lower interest rates are very favorable for small cap stocks which generally do not have as easy access to capital as their larger counterparts.

Last month’s signals were mixed. The one month stop at growth was ill-timed for the Style model, producing negative returns during a period in which the stock market rose slightly. The mid cap signal also lagged the market but did produce a positive return. So far this year, the Style model is trailing the overall market but this is offset by good performance for the Market Cap model.

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, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov.

Posted by Steve Birenberg at April 1, 2014 02:36 PM in Models