Northlake’s Style model moved back to a neutral reading between growth and value for November.  As is often the case when a trend change may be under way, the model signals can be volatile from month to month.  In this case, after a long stretch favoring growth stretching back most of the past several years, the Style model appears to be transitioning toward value.  This makes sense given that interest rates and inflation may have bottomed at the same time that global economic growth risks have moderated.  What we used to think of as a normal economy would favor value over growth so when you read about the Federal Reserve wanting to normalize monetary policy that could also be read as a signal suggesting value stocks may be poised for outperformance.  Thus, the model appears to waffling between value and neutral until stronger evidence confirms a shift to value.

As a result of November’s neutral signal from the style model, one half of client positions in the Russell 1000 Value (IWD) have been sold and proceeds reinvested in the Russell 1000 Growth (IWF).  There is no change to the mid cap recommendation from the Market Cap model, so client positions in the S&P 400 Mid Cap (MDY) will be held for at least another month.

The shift back to neutral from value in the Style model was driven by internal technical and trend indicators.  Two breadth indicators are showing that growth stocks may be poised for improved relative performance in the near-term.  The interplay of internal technical/trend indicators and external economic and interest rate indicators is a key part of the models.  The internal indicators are shorter term in nature and designed to help the timeliness of the model recommendations against the longer term data series that dominate the external indicators.

Last month, the shift from neutral to value proved beneficial as value outperformed growth in September. The mid cap signal for October was mixed.  Small caps had a horrible month so mid cap was better than small cap but large caps still did best even though they fell during September.

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.