Northlake’s Market Cap model shifted from large cap to mid cap for December. As a result client positions following this model were shifted from the S&P 500 (SPY) to the S&P 400 Mid Cap (MDY). There is no change to the growth signal in the Style model. Client positions in the Russell Growth (IWF), initiated for the first time last month, will be held at least until January.

As a reminder, November marked the debut of revisions to the Market Cap and Style models. Each model has new inputs and has shifted to a formal set of internal and external indicators. The internal and external indicators replace the former use of “economic, interest rate, and stock market indicators” with the stock market indicators now becoming the internal indicators.

Before looking more at the latest signals, here is recap of how the models work. The Market Cap model continues to recommend either large, mid, or small cap. The Style model has undergone greater change and now has six possible outcomes: large cap growth, small cap growth, large cap value, small cap value, large cap neutral, and small cap neutral.

Further analysis completed by Ned Davis Research (NDR), the original developer of the models, indicated that adding a neutral option produced value added (i.e. better returns in the long run). Northlake worked with NDR to see if linking the style signal to the market cap signal would also add value. We determined that when the Market Cap model was on a small cap signal, the model produced a greater return if the style exposure was also in small cap.

We are in the process of completing a “white paper” describing the models and the changes in detail. It should be in your inbox within the next week.

Going back to the new December signals, the Market Cap model shifted to mid cap primarily due to shifts in internal indicators. Three indicators moved from the large cap to small cap column: Stocks Above 50 Day Moving Average, Net New Highs, and Adjusted Advance-Decline Line. These indicators confirm a broadening advance in the market, historically a time when small and mid cap stocks perform better than large cap stocks. The shift in these indicators moved the overall internal indicator recommendation from large cap to mid cap. In turn, the move of the internal indicator to mid cap when balanced against a weak large cap signal from the external indicators, shifted the entire Market Cap model to mid cap.

The Style model had a lot less volatility this month. Only one underlying internal indicator shifted, as the Moving Average Cross now favors growth. The internal indicators in the Style model strongly favor growth reflecting good performance from a wide array of growth stocks over the past few months. The external indicators are a split decision and rest on a neutral reading. The combination of growth internal and neutral external leads to a solid growth signal.

Last month was the first using the newly updated models and the results were good. The Market Cap model was recommending large caps (SPY) that gained almost 3%, while mid cap was up less than 2% and small cap was barely positive. The large cap signal has been in place since August 1st during which time large caps have gained over 7% compared to a rise of over 5% for mid cap and small cap. The Style model completed its first month on a growth signal in November and growth outperformed value across large cap and small cap.

MDY and IWF are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov.