Each of Northlake’s models flashed a new signal for October.  The Market Cap model shifts from large cap to mid cap after four months favoring large cap.  The Style model moves to growth after two consecutive months at value.  In response to the new signals, client positions following the models that owned the S&P 500 (SPY) and Russell 1000 Value (IWD) were sold and proceeds reinvested into the S&P 400 Mid Cap (MDY) and Russell 1000 Growth (IWF), respectively.

The changes in both models were driven by internal factors that measure trend and technical indicators within day-to-day stock market activity.  These measures often look at multi-week or multi-month stretches so as not to get whipsawed around.  The models are designed to predict relative performance over longer time periods of at least three to six months.

After lagging the market for most of 2017, small cap stocks rallied sharply in September and have just about caught up to the nice gains for large cap stocks so far this year.  Investment strategists ascribe September’s small cap gains to renewed enthusiasm about tax cuts that led to a return of the reflation trade that was popular immediately after Trump’s election victory.  Two internal indicators flipped from large cap to small cap for October driving the change in the Market Cap model.

The Style model saw only one indicator change for October but given that the model was balanced at a neutral reading that was enough to shift the signal to growth.  The new signal is just over the border for growth.

We never second guess our models but we are comfortable with a mid cap and growth bias at the moment while we see the potential for further gains in the major market averages through yearend.   Mid and small cap stocks often lead when the market has a bullish tone.  Growth also has a history of leading performance during bullish sentiment but major tech stocks like Google and Facebook and Amazon can often be impacted by the still popular rotation trades we have discussed in the past.

The most recent set of signals for large cap and neutral did their job as they allowed Northlake clients to track the nice gains in the benchmark S&P 500 during the third quarter.

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.