Northlake’s Market Cap model shifted from mid cap to large cap with the latest monthly update.  The Style model sticks at neutral for the fourth consecutive month.  The change to large cap is driven by technical and trend factors with external factors focused on the economy and interest rates already leaning toward large cap for the last few months.  The market volatility, up and down, can cause the market internal factors to react more often.  This is purposeful as a way for the models to be sensitive to near-term trends.  We have executed this trade by selling the S&P 400 Mid Cap (MDY) and reinvesting proceeds into the S&P 500 (SPY).  Northlake continues to think that small cap, mid cap, and value also look good over the coming three to six months despite the model shift.  Small and mid cap stocks are more volatile and have done very well in the current rally and held up better in the early fall market weakness.  With a series of market-moving catalysts including the November Fed meeting and CPI report followed by the mid-term elections, taking some volatility off the table after one of the best months for the market in recent years is appealing.

The just concluded mid cap signal worked well.  We swapped from large cap to mid cap on August 1^st.  From that time through the trades completed moving back to large cap, the S&P 500 fell about -8% and the S&P 400 Mid Cap fell just -1.5%.  small cap did the best, with the Russell 2000 up almost one half of one percent.

Beyond our Market Cap and Style models, we have been patient with our exposures to value, small cap, and sector funds targeting industrials, finance, and health care.  We have also stuck with international. Except for international, all these themes have been leaders on the current rally.  International has struggled due to weakness in China and Europe.  China is doing poorly with due to its zero Covid policy and poor reaction to the recent Communist Party Congress.  Europe’s economy is not holding up as well as the U.S. due to the geographic proximity to the war in Ukraine.  Weak performance from Alphabet, Meta, Microsoft, and Amazon may indicate the decade long love affair with Big Tech may be at an end.  That does not mean those stocks will not do well in the next bull market, but it might mean that a broader group of stocks will show leadership.  This would be good news for Northlake’s strategies that are based on broad diversification.

SPY, IWF, and IWD are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. MDY is held in select client accounts.  Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov.