Northlake’s Market Cap model shifted to mid cap from large cap for May.  As a result, client holdings in the S&P 500 that are linked to the model will be sold and proceeds reinvested in the S&P 400 Mid Cap (MDY).  There is no change to the neutral reading from the Style model, so client positions dedicated to this model will remain evenly split between growth (IWF) and value (IWD).

The change to mid cap in the Market Cap model is driven mostly by the 2-month smoothing process that determines the final reading.  Last month, the April only reading was already at mid cap driven by the internal trend and technical indicators.  Another indicator in this group flipped to small cap for May, while all the rest of the indicators in both the internal and external groups remained unchanged.  This was enough to slightly strength the mid cap reading for May and move the 2-month average into mid cap territory.  The new signal is not particularly strong as the external indicators continue to favor large cap reflecting the weaker data on the U.S economy as confirmed by the low reading for 1Q16 GDP growth reported last week.  The models purposefully combine internal and external indicators to maintain a balance between what the data is saying and what the market action is saying.  Stocks are a leading indicator, so trend is important to consider side-by-side with the data.

The Style model saw two internal indicators move from value to growth but this was not enough to shift the recommendation from the neutral reading.

During the time the large cap reading was in place, the Market Cap model would have been better off in small or mid cap but there was nothing lost on a relative basis to the benchmark S&P 500.  The Style model would have been best positioned in a pure value reading last month.  The stock market rally off the February low continues to be led by energy, commodity, and cyclical stocks.  This is happening because those sectors were severely depressed early in the year as fears of global recession ran rampant.  Mostly due to weakness in the dollar, those worries have dissipated and allowed these sectors to rebound sharply.  The neutral reading has not been ideal these past few months but it has allowed for partial capture of significant gains for value stocks.

MDY, IWD, 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.