My attendance at the UBS Media Conference led to the delay in getting the latest model signals up on the website. Fortunately, the models did not signal change for this month. Here is some detailed commentary:
There were no changes to the signals from Northlake’s Market Cap and Style models for December. The Market Cap model continues to send a mid-cap signal, while the Style model moved to a stronger growth signal. As a result of this month’s update, I made no changes to client ETF holdings. The Market Cap allocation continues to be split evenly between the large-cap S&P 500 (SPY) and the mid-cap S&P 400 (MDY). The Style allocation remains 100% Russell 1000 Growth (IWF)…..

Looking at the underlying factors that make up each model, on the market cap side, I think it is fair to say that the signals remain mixed. This model flashed a mid-cap signal from January through June and then switched to a four-month run favoring large cap. The move back to mid caps in November was largely a function of better relative performance for small caps in the late summer and early fall. I consider the current signal from this model to be weak which is why I am splitting my exposure between large and mid caps.
The Style model is more interesting as it has moved firmly into growth territory. The current signal is the strongest in favor of growth since the fall of 2005. Before that, the last time the growth signal was this strong was in mid-2003. Almost all the underlying indicators are lined up in favor of growth including narrow credit spreads, a below-average relative P/E premium, outperformance by consumer stocks, bullish overall market sentiment, the weak U.S. dollar, and a variety of intermediate-term technical indicators that are picking up improved performance for growth stocks over the past six months.
The only factors favoring value are the inverted yield curve and continued moderate economic growth. The yield curve favors value either when it is very steep or inverted. Historically, growth has performed best with a normal upward sloping yield curve in place. With recent indications that 4Q06 GDP growth may slip toward 0%, the coincident indicator that measures GDP growth in this model will likely flip to growth soon, leaving only the shape of yield curve favoring value.
Northlake’s models are implemented in a disciplined manner, leaving me little flexibility to adjust my dedicated ETF holdings. However, I also use the models to influence the limited assets managed outside Northlake’s ETF rotation strategy. The strengthening growth signal has me considering a trading position in the Nasdaq 100 (QQQQ) if last week’s volatility leads to a more substantial pullback in the broader market averages.