I am a little delayed getting up the monthly update on the Northlake’s Market Cap and Style models because I wanted to check with Ned Davis Research (NDR), the firm that processes the models, about this month’s readings. For just the second time ever, in monthly readings going back to 1981, the “score” of both models was unchanged. It is rare for even one of the models to be unchanged from month-to-month. In fact, against the 0 to 100 scoring system, the average monthly swing in the Market Cap model has been 5 points, while the average monthly swing in the Style model has been 10 points. NDR has confirmed the signals for April were correct and referred to the outcome with the “100 year flood” cliché.
With no change in either model, the signals remain Mid Cap and Value. The signals are implemented in client portfolios with holdings of the S&P 400 Mid Cap (MDY), the Russell 1000 Large Cap Value (IWD), and the Russell 2000 Small Cap Value (IWN). The ratio of IWD to IWN remains $3 to $1. Overall, the models are sending mixed signals indicating that trends in the economy, interest rates, and the stock market are split. This is consistent with the up-down action the stock market has seen since January, as the models seem to be picking up the split in sentiment among investors. The models continue to be most heavily influenced by the consistent but moderate growth in GDP, upwardly trending interest rates and a flattening yield curve, and readings which suggest investors are willing to tolerate an above average level risk in their portfolios….

Performance of the models was pretty good last month with the Mid Cap signal continuing to provide a boost. In March, the holding in MDY gained over 2.3%, more than 1% greater than the benchmark S&P 500. The Mid Cap signal began flashing in September 2005. It has also been accurate over this entire period, producing a gain of 11% vs. just over 6% for the S&P 500. For all of 2006 so far, MDY has gained about 7.5% vs. 3.8% for the S&P 500. Returns could have been even better had the model been flashing a small cap signal since last fall but it is tough to complain about the returns that have been generated.
The IWD/IWN combo has been in pace for just two months. During that time, value and growth indices have produced almost identical returns. However, thanks to the ownership in the small cap IWN, the combined IWN/IWD holding has produced a return comfortably in excess of the S&P 500. I use the $3 to $1 large cap growth or value vs. small cap growth or value as a default weighting that roughly reflects the overall weighting of the broad US market. I would add to the small cap holding if the Market Cap model moved to a strong small cap signal. Similarly, I would increase the large cap holding if the Market Cap model moved to a strong large cap signal. Neither appears in the cards over the next couple of months based on the current signal and the position of the underlying factors.