There we no changes to the signals from Northlake’s Market Cap and Style models for March. The favored themes remain Mid Cap and Value. As a result the latest signals, there will be no change in Northlake client holdings dedicated to the models. Clients will continue to own the S&P 400 Mid Cap (MDY) and the Russell 1000 Value (IWD).
With no change to the signals, it is not surprising that movement in the underlying indicators was minimal. In each model, one factor shifted against the latest signal. Overall, the Mid Cap and Value signals look firm and are likely to remain for April barring significant market movement that impacts the shorter term technical and trend indicators.
The Market Cap model has already been impacted by market trends as the market breadth indicator shifted from large cap to small cap for March reflecting the positive relative performance for small cap stock indices over the past several months. The Market Cap model now has four indicators favoring small cap and six favoring large cap, resulting in a mid cap signal. The model is balancing the positive momentum of a long running bull market with economic statistics that are suggesting the recovery is nearing a normal path. Small caps are the choice on the turn off the bottom in the market and economy, while large caps work best in latter stages of bull markets and economic expansions. Right now, we appear to be a midpoint so the model flashes a mid cap signal.
In the Style model, the one factor that shifted was relative valuation. The price-earnings ratio of growth stocks compared to value stocks is now below the long-term average indicating that growth stocks look relatively cheap. However, the Style model remains very firmly in value territory with only two of the ten indicators flashing a growth signal.
The models performed reasonably well last month. The mid cap signal provided an excess return of more than 1% vs. the benchmark S&P 500, although small cap stocks did even better. A small cap signal would have earned 1% more than the mid cap signal. Year to date, mid cap has been the best performer, up about 6.5% versus 5.9% for large cap and 5.2% for small cap.
The Style model produced more modest incremental returns in February with the 3.8% return exceeding the S&P 500 and the growth index by about one half of 1%. So far in 2010, growth, value, and the S&P 500 have all earned plus or minus 6%.
Disclosure: MDY and IWD are widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor.