Northlake’s Market Cap model shifted from large cap to mid cap for March after a six month run favoring large caps.  As a result, client positions in large cap (S&P 500/SPY or Russell 1000/IWB) have been sold and proceeds reinvested into the S&P 400 Mid Cap (MDY).  There is no change to the growth signal from the Style model which has been in place since the start of 2019.

We indicated last month that a shift form large cap to mid cap was possible as our final reading is based on a trailing two month smoothing and the single month reading just for January was already in mid cap territory.  Driven primarily by internal indicators designed to capture market technical and trends, the February reading shifted firmly into mid cap range thus moving the two month smoothed final reading for March.  Interestingly, the external indicators that are focused on macroeconomic indicators still favor large cap.  This is likely due to the slowing domestic economy which would favor large cap companies.  The stock market is saying that slowing growth will not continue toward a recession and thus is buying small and mid caps.  This is a great example of how the models are built to work together – external indicators focusing on macro data that is longer term and trailing vs internal indicators meant to improve timing by capturing changes in trend and market technicals.

The Style model did not change from its growth signal but it did move in the direction of value as two internal indicators shifted.  The recent stock market rally has featured improved performance from value stocks as the long running growth and FANG leadership has faltered.  This is healthy for the market as a broader advance with more industries participating is a good thing.  The shift toward value in these two indicators is also consistent with the discussion above about the market taking the slowdown in economic activity in stride and not worrying it will lead to a recession.  Probably the most important factor in this view by the market was the Federal Reserve abruptly pivoting away from a tightening stance by slowing or stopping rate increases and balance sheet shrinkage.  Let’s hope that the Fed’s policy shift is not because they are worried about something much worse around the corner!

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