There are no changes to Northlake’s Market Cap and Style models for December. I continue to own Small Cap (IWM/IJR) and Value (IWD/IVE) for personal and client funds . As a reminder, Northlake uses monthly models to rotate ETFs trying to capture excess return relative to the S&P 500 (SPY). The models are designed to look ahead six to twelve months and average holding periods are four to six months.
I was actually a bit surprised that the Market Cap model stayed at small cap. I had thought the significant weighting of technical indicators in the model would have shifted the model from a small cap to mid cap signal (the model works in steps and rarely will go from large to small or small to large without a stop at mid). However, the sharp drop in interest rates and a small bounce in advisory service sentiment off its low provided fresh signals favoring small caps and actually led to an ever stronger small cap signal this month. Of the ten underlying indicators measuring a variety of economic, interest rate, valuation, and technical factors, seven now favor small cap, with two recommending large cap and one neutral.
The Style model remained firmly in value mode for the third consecutive month. The only underlying factor which changed this month was insider activity which now favors growth over value. The Style model also uses a mix of economic, interest rate, valuation, and technical indicators. For December, six of the nine indicators favor value and three favor growth.
Recent performance of the Market Cap model has been poor. In November, the small cap signal was way off with IWM falling 11.7% vs. a loss of 7.2% for SPY. Since the small cap signal went in place on September 1st, IWM is down 35.9% vs. 30.2% for SPY.
The Style model has fared better with value outperforming growth but not providing incremental return to the S&P 500. Last month, value outperformed growth across all market caps. I am presently invested in Russell 1000 Value which fell 7.% last month, a little worse than the S&P 500 but ahead of the 8.4% drop in the Russell 1000 Growth (IWF). The value signals has been in place since October 1st during which IWD is down 23.2% vs. 24.7% drop in IWF. The S&P 500 is down 23.1%