For the first time since June 2007, Northlake’s Style model is flashing a value signal. The new signal breaks a 15 month run of growth signals. As a result of the new signal, I sold all client positions in the Russell 1000 Growth ETF (IWF) and purchased dollar-for-dollar in the Russell 1000 Value ETF (IWD).
There was no change to the Market Cap model which is flashing a small cap signal for the second consecutive month.
The readings on both models suggest that the November signals will be the same….

….Six of the nine factors in the Style model now favor value. Two factors switched to value this month and one got stronger. The yield curve has now steepened to the point at which value tends to outperform. The larger weighting for financial stocks in the value indices certainly plays a factor. The other factor to shift to value is the dollar. A strong dollar is consistent with value outperformance. Growth stocks get a bigger benefit from a weak dollar due to their greater overseas exposure. The indicator that strengthened in favor of value is credit spreads. They are very high now as we all know. This is a contrarian indicator such that value indices benefit as credit spreads narrow.
The Market Cap model is sending a stronger small cap signal this month because of dollar strength. A weaker dollar favors large cap companies that generally have greater overseas operations.
The long running growth signal was a good one with IWF outperforming IWD by about 700 basis points. However, value has been outperforming since June thanks largely to the rebound in financial stocks off their summer lows. At its widest the growth signal was outperforming value by 1300 basis points.
Last month was the first for the small cap market signal. It worked out well with the Russell 2000 ETF (IWM) falling 7.9% vs. a 9.9% decline for the S&P 500 ETF (SPY) and an 11.1% decline for the S&P 400 Mid Cap ETF (MDY). Small caps have underperformed sharply for the past week or ten days, however.