Both of Northlake’s models are sending new signals for November.  The Market Cap model shifted back to mid cap after just two months at large cap.  The Style model moved to neutral after ten months at growth.  Both shifts reflect slightly improved economic data and reduced risk of a U.S. recession.  As a result of the changes, client positions following the model held in the S&P 500 (SPY) were sold and proceeds reinvested in the S&P 400 Mid Cap (MDY).  In addition, client positions invested in either the Russell 1000 Growth (IWF) or S&P 500 Growth (SPYG) were sold and reinvested into the Russell 1000 Value (IWD).

We were not expecting the Market Cap model to shift back to mid cap although the prior month reading did take a significant step from large cap to mid cap.  The signal is based on two month smoothing to dampen volatility and increase the odds that a trend shift has occurred.  Thus, the new mid cap signal reflects another step toward mid cap and leaves the signal just over the line to mid cap.

The new mid cap signal is driven by two indicators.  One shows better market breadth, a favorable dynamic for small and mid cap stocks.  The other is a positive change in the measure of coincident to lagging economic indicators.  This means that recent economic data is improved relative to older data.

Over the last few months, the Style model reading in favor of growth had been getting weaker to the point that it was just barely recommending growth in October.  There was only one indicator change for November but it was enough to help trigger the move to neutral.

Stepping back to look at trends in the models over the last several months, it is clear that the indicators are picking up stabilization and slight improvement in U.S. economic data and reduced risk of a recession.  In turn, market breadth has improved (the ratio of advancing to declining stocks).  For much of 2019, the stock market advance has been firmly led by large cap stocks but over the last few months small and mid cap stocks have been participating in the rally more regularly.

Northlake has been firm in its market outlook that a U.S. recession was unlikely.  This kept us bullish as the combination of slow but steady economic growth combined with low interest rates and dovish monetary policy is a recipe for stocks to move higher.  The new signals from Northlake’s Market Cap and Style model fit perfectly with Northlake’s outlook.

The just closed ten month long growth signal performed very well, producing a return of 26% against 21% for the broader market.  The short-lived large cap signals gained about 3.6% just slightly lagging the S&P 500 gain of 3.8%.

MDY, IWD, IWF, and SPYG 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