After reviewing our models, there are changes to both the Market Cap and Style exposure.  The changes are driven by a shift in Market Cap exposure from small cap to mid cap.  This change leads to a move from small cap growth to large cap growth.  We only maintain small cap exposure in Style if our Market Cap positioning is also small cap.  As a result of this month’s updates, we are selling all client positions in the Russell 2000 (IWM) and the Russell 2000 Growth (IWO).  Proceeds of the IWM sale are being reinvested in the S&P 400 Mid Cap (MDY).  Proceeds from the sale of IWO are being reinvested in the Russell 1000 Growth (IWF).

We like the shift back to mid and large cap following the big summer stock market rally.  Seasonally, we are entering a period of market weakness that historically is reinforced in Presidential election years.  Small cap stocks performed much better the last few months, especially in August, as cyclical value stocks and COVID losers rallied on better economic data, corporate earnings, and a rollover of the second surge of COVID cases. Moving to mid cap and large cap growth reduces risk modestly should the market pause or pullback during September.  Small cap stocks have the highest volatility and typically make larger moves than mid and large cap stocks. 

Northlake is not bearish, but we feel a bit of caution is warranted after a huge rebound from the March lows.  Our recent small partial sales of Apple and Activison Blizzard foot well with our shift away from small caps as all of these trades reflect a desire to have a modestly more cautious stance toward the market in the near-term.  Should our outlook prove incorrect and small cap stocks continue to rally, the high correlation between small and mid cap stocks means that we will get plenty of exposure to small cap leadership through new client positions in MDY.

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.