The June signals from Northlake’s models led to significant shifts in client and personal portfolios on Thursday. Overall, the changes moved portfolios from being small and mid cap biased to being large cap biased. The result reduces risk and volatility by moving half of the S&P 400 Mid Cap (MDY) exposure to the S&P 500 (SPY) and all of the remaining Russell 2000 Value (IWN) to Russell 1000 Value (IWD). Looking at this another way, the portion of portfolios dedicated to Northlake’s models went from 50% mid cap, 38% large cap, and 12% small cap to 75% large cap and 25% mid cap.
The trigger for this shift was movement in the Market Cap model from a firm mid cap signal to a split decision between mid cap and large cap….

The models Northlake uses score on a 0 to 100 scale based on a two month rolling average. For June, the score rests right on the point that divides a mid cap signal from a large cap signal. There was no change in Style model which continues to favor value over growth.
Over the last two months, two of ten factors that make-up the Market Cap model shifted. For May, a measure of NYSE breadth picked up underlying deterioration in the stock market, while for June the factor measuring the U.S. dollar picked up weakness in the currency. Each of these changes favors large caps relative to small caps. There are a couple of other technical factors that I thought might also shift to a large cap signal, but I believe the bounce we had on Wednesday during which small caps outperformed probably prevented this indicator from changing modes.
I am pleased to have reduced client risk profiles, as measured by relative performance vs. the S&P 500. I think the recent market break is the start of a transition period toward better relative performance for large caps. Even f I am wrong, I think this transitional period carries a lot more risk for small caps as any retest of recent lows would lead to another drubbing for highly volatile indices.
Cash positions in client portfolios are still on the low side. My current plan is to raise cash if the market recovers a bit more. I had feared that I had remained too aggressive via the combination of being fully invested and favoring small and mid caps but the rally the last two days and the fresh signal allowed a “do over” where I could lower portfolio risk profiles on strength. As they say, “better lucky than good.”