Each of Northlake’s models shifted for September.  The Market Cap model is now recommending large cap and the Style model is at neutral.  Each of these signals moved after just one month and went back to the prevailing themes that began in June.  Given the new signals, client positions in the S&P 400 Mid Cap (MDY) are being sold and reinvested in the S&P 500 (SPY).  In addition, half of the current holdings in the Russell 1000 Growth (IWF) are being sold with proceeds placed in the Russell 1000 Value (IWD).

Both of these moves make sense to Northlake given recent market action and macro trends.  We like being in lower volatility large caps given negative seasonality in September and October, uncertainty as the mid-term elections come into focus, tightening policy at the Federal Reserve, the trade war, weak emerging market currencies, and ongoing investigations of President Trump.  This may sound like a reason to be bearish but we note each of these items has been in place all summer and the market climbed the “wall of worry.”  Please keep in mind that even as Northlake attempts to produce strong absolute returns, the models are attempting to augment relative performance by selecting the leading themes.

Both models were close to their new signals last month so it did not take a lot of movement to cause the switches.  The Market Cap model moved based on a breadth indicator that showed the number of stocks above their 200 day moving average slipping.  Narrow leadership often leads to weaker market performance, a time when large caps typically outperform.  The Style model shift was also triggered by technical indicators focused on breadth.  A downturn in the number of stocks making new highs and stocks trading above their 50 day moving averages led to the move from growth to neutral.  These indicators also suggest less breadth as the market has hit new highs, often a signal for less aggression, which usually is accompanied by a shift toward value from high flying growth stocks.

Growth and Mid Cap were good signals during August and both models have performed well so far in 2018.  The Style model has led the way capturing most but not all of the leading performance for growth stocks so far this year.