Northlake’s Market Cap and Style models again favor large cap and growth for November.  As a result, client portfolios that use the models will continue to own the S&P 500 (SPY) and the Russell 1000 Growth (IWF) for at least another month.  Clients using thematic strategies but not Northlake’s models have exposure to large cap and growth through investments in SPY and the NASDAQ 100 (QQQ).

Looking under the hood of the models shows some interesting developments.  The Market Cap model’s internal indicators are unanimous in support of large cap for the second straight month.  However, small cap is now favored by a majority of the external indicators.  The massive outperformance of large cap technology stocks is driving this divergence since it does not reflect the reality of current conditions for interest rates and the economy.  Economic strength is good for small caps.  Higher interest rates is bad for small caps but the rise in rates has reached an extreme that history suggests is the time to be contrarian and favor small caps.  If there is a modest improvement in small caps relative performance, next month could see a shift back to mid cap.  As a reminder, the Market Cap model takes one step at a time in all but extremely rare cases.  The Style model remains firmly in growth mode.  Better market breadth beyond the large technology stocks is necessary for the Style model to move toward value.

SPY, QQQ, 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.