It’s a new year but there were no changes to Northlake’s Market Cap and Style model signals for January. The Market Cap Model continues to favor mid caps and the Style model remains firmly in the growth camp. Within my personal and Northlake client accounts, I am implementing the Market Cap signal by holding equal amounts of the S&P 500 (SPY) and the S&P 400 Mid Cap (MDY). The entire exposure to the Style model is in the Russell 1000 Growth (IWF).
Both signals are the results of a somewhat muddled group of indicators looking at economic, interest rate, and technical measures. My interpretation is that the indicators are picking up the slower economic growth increasingly evident over the past six months but the implications of the slowing are mixed for major investment themes. In other words, the market is operating without a major theme with all investment strategies rising and falling together. This is far different than the consistent themes of small caps and value that were evident from the bottom in the market in 2002 until the breakout last summer. I suspect the correct interpretation is that we are transitioning to new leadership. Large caps seem likely candidates but I don’t the evidence is strong enough yet to make a big bet on that outcome.
Since we are at year end, I thought I’d offer a look back at performance of the models in 2006….

Overall, despite poor signals in December, the models were pretty accurate. As implemented in real accounts, the Market Cap model beat the S&P 500 by about 160 basis points and the Style model beat the S&P 500 by about 400 basis points. The key to the good results was the value signal that was in place for most of the first half of 2006, my use of small cap value early in the year to leverage a persistent Mid Cap signal from the Market Cap model, and great performance from Mid Caps until the sharp decline in the market in May.
I’ll close with a quick thanks to Ned Davis Research who developed the models I use, continues to maintain them and provide me with consulting, and allows me to write about them on here and on StreetInsight.com. Special thanks to Alex White, Ed Clissold, and Tim Hayes.