There are no changes to Northlake’s Market Cap and Style models for November. The signals continue to be small cap and value. As a result of the update clients continue to own the Russell 2000 (IWM) and the Russell 1000 Value (IWD) to reflect the latest signals. As a reminder, these are monthly models designed to predict relative performance over the next several quarters. The average holding period is 4-6 months.
The Market Cap model remains pretty firmly in small cap territory but the signal weakened based on the latest data. The weaker signal occurred primarily as a result of the very poor performance of small caps in October when the Russell 2000 underperformed the S&P by more than 5%. This pushed the trend and sentiment indicators off their previous small cap signals. There were no changes to the other underlying indicators which measure economic, interest rate, and stock market factors. Key to the small cap signal are the steep yield curve, unusually wide credit spreads, the stronger dollar, and economic indicators that are so bad they are good for small caps (they are predicting the next move is up so it is time to go small).
The Style model is registering its strongest value reading since the first half of 2006. Seven of the nine indicators in the model now favor value up from six last month. The factor measuring relative P-E moved in favor of value this month.
Last month the signals were not very helpful….

….The value signals did no damage as IWD fell almost exactly the same as the S&P 500. The small cap signal was poor as the IWM fell 21% about 5% worse than the S&P 500. In a relative performance world, a 500 basis point miss is bad news. It could have been worse as at one point early last week before the market rallied the gap was about 10%. The last time the Russell unperformed this badly was back in 2002. There were several months in the 2000-2002 bear market where small caps underperformed. In fact, scanning monthly data all the way back to 1980, most of the months where the Russell has massively underperformed the S&P 500 have been during bearish periods.
As always, thanks to Ned Davis Research, which developed and continues to maintain these models.