There were no changes to Northlake’s Market and Style models for August. The market Cap model continues to recommend Mid Caps and the Style models still favors Value. As a result, Northlake client positions in the S&P 400 Mid Cap (MDY) and the Russell 1000 Value (IWD) will be maintained for another month.
The Market Cap model saw a few shifts in its underlying indicators with one moving from large cap to small cap and another shifting the opposite way. The overall model thus held quite steady. Moving to small cap was the market breadth indicator which reflects the broad rally in July that lifted all the major indices, sectors, and themes up in unison. Shifting to large cap was the coincident indicators factor. This factor reflects the ongoing economic recovery. Small caps make sense when the economy is doing quite poorly because cyclical influences mean the next move is likely up. Therefore, when things look bleak the riskiest trade makes sense. Now that a recovery is underway, even if it is stalling, it no longer makes sense to play the higher risk small caps. Overall, the Market Cap model continues to reflect a moderate economic recovery that is supportive of the stock market.
The Style model saw no changes in its underlying factors. The signal remains in a very strong Value position. Value stocks are favored in a moderate economic growth environment where cyclical economic growth can drive earnings of industrial, materials, and financial corporations that dominate value indices.
As noted briefly above, the July stock market rally was remarkably broad and consistent. The S$P 500 gained almost 7% and most all other major indices gained right around the same amount. MDY was up 6.8%, the small cap Russell 2000 (IWM) was up 6.8%, IWD was up 6.8%, and the Russell 1000 Growth (IWF) was up 7.2%. Little value can be added by Northlake’s model when the market moves in unison but neither can anything be lost. So far this year, both models have added value and outperformed the S&P 500.
Disclosure: MDY and IWD are widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg’s personal accounts. IWM is a core position for selected clients of Northlake Capital Management. Steve Birenberg is sole proprietor of Northlake Capital Management, LLC, an SEC registered investment advisor.