May’s sharp market correction caused a lot of underlying movement in Northlake’s Market Cap and Style models but not enough to change the signals for June. The Market Cap model continues to signal small cap and the Style model remains favoring value. As a result, Northlake client positions dedicated the Core and Explore strategy will remain invested in the Russell 2000 (IWM) and the Russell 1000 Value (IWD).
The Market Cap model had quite a bit of underlying movement with three indicators shifting in favor of large cap and one indicator moving toward small cap. Moving to large cap were deteriorating bullish sentiment, the flattening of the yield curve, and narrowing market breadth. Shifting to small cap was the strengthening of the U.S. dollar as small cap stocks have less exposure to negative currency translation and increased competitiveness of foreign companies. Overall, the movement in the Market Cap model suggests a desire to take less risk as the volatility in global financial, currency, and commodity markets threatens the economic and corporate earnings recovery. The Market Cap signal for just June is actually in mid cap territory (the signal Northlake uses is a two month average). Relative stability in the indicators for June is likely to shift the model to Mid Cap for July.
The Style model also had increased underlying movement this month with the result being an even stronger signal in favor of value. Lower P-E ratios for value relative to growth and the strengthening dollar work in favor of value. The one shift in favor of growth was insider activity where buying and selling is now more balanced between growth and value stocks. The Style model continues to show confidence in the economic recovery and is attracted to the cheaper stocks in the value universe. The current value signal is strong is extremely strong and will certainly remain value for July.
Disclosure: IWM and IWD are widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg’s personal accounts. IWM is a short hedge in the Entermedia Funds. Steve Birenberg is co-portfolio manager of the Entermedia Funds, owns a portion of the Funds’ investment management company, and has personal monies invested in the Funds.