There are no changes to the signals from Northlake’s Market Cap and Style models for August.  Last month, we shifted to small caps and small cap growth and these signals remain in place.  Client positions following the models will remain invested in the Russell 2000 (IWM) and the Russell 1000 Growth (IWO) for at least one more month.

The Style model is stronger for growth this month, which is no surprise given the continued leadership of the major tech stocks.  This supports trend and technical indicators.  One area where value has gained is the improvement in many commodity prices.  Commodity prices including gold, lumber, and copper have moved up in recent weeks.  This is usually taken as a sign that inflation could turn higher and the economy could strengthen.  Value indices contain cyclical stocks that perform better when inflation and commodities are higher.

This could be important as it also syncs with the small cap recommendation from the Market Cap model.  While there are many growth stocks in the Russell 2000, there has been a firm trend for several years, accelerated by the pandemic, for investors to prefer to large cap growth stocks.  A lot of trading takes place driven by algorithms that trade big baskets of stocks.  One such trade is to buy large cap growth and sell small cap.  Northlake believes that the relative performance of large cap vs small cap has reached an unsustainable extreme.  A trigger such as rising commodity prices or higher inflation expectations is what is needed to shift the algorithms.  Another trigger would be a flattening and decline in COVID case curves.  While the headlines remain quite negative on the latest surge in COVID, the curves have flattened and 7 day moving averages of cases are off their highs from a week to ten days ago nationally and in the large Sun Belt states including Arizona, California, Florida, and Texas.  Should this continue, small cap stocks are poised to outperform.  Small cap stocks would also do better on positive vaccine news.  August is scheduled to see data released on a number of vaccines.

In July, small cap and small cap growth performed well on an absolute basis but still trailed large cap due to the concentration of gains in stocks like Amazon, Apple, and Facebook.  We are encouraged by the positive returns in small caps and think the setup is improving for a rotation toward small caps.

IWM and IWO 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.