There are no changes to the recommendations from Northlake’s Market Cap and Style models for May.  The Market Cap model is signaling large cap for the second consecutive month, while the Style model remains on a growth signal for the third straight month.  As a result of the latest signals, Northlake client accounts following the models will continue to own the S&P 500 (SPY) and the Russell 1000 Growth (IWF).

Last month we noted that the large cap signal was one of the strongest on record.  This remains the case again for May.  As would be expected given a repeat of the exceptionally strong growth signal, there was little change in the underlying indicators in the Market Cap model.  Again this month, seven of the eight internal and external indicators are flashing large cap.

This is not the case in the Style model where five of the fourteen indicators shifted from growth to value.  The single month reading puts the Style model at neutral but to dampen volatility and false signals, our model uses two month smoothing where growth is still favored. We are not surprised that there was a move back toward value given all the issues that have popped up with growth stocks (FB privacy issues, GOOG earnings) and the volatile daily trading of growth stocks.  In addition, there has been an increasing focus on higher interest rates and higher inflation.  Each are late cycle phenomenon, which is often a time that value stocks outperform.

A typical day in Northlake email contains at least one report discussing whether the growth stock trend is rolling over in favor of value.  This is why we use models.  We want to base our decisions on facts and proven reasoning that has worked historically.  Providing added comfort is the heavy use of technical and trend indicators in Northlake’s models that are designed to make sure major trends are captured fairly early as they are established and take hold.  We may be at an inflection point in the long running growth over value theme.  Timing will not be perfect but if we can capture most of multiyear shift in themes, the value added exists for clients.

SPY 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.