Northlake’s Market Cap model shifted from Mid Cap to Small Cap for November. As a result, client positions in the S&P 400 Mid Cap (MDY) have been swapped into the Russell 2000 (IWM). There was not change in the Style model, which is recommending Growth for the second consecutive month after a long run at value.
To be honest, I am a little wary of a shift to small cap after huge outperformance for this segment so far this year. The Russell 2000 is up 28% this year, ahead of the 23% gain in the S&P 500. October was the first month in a while where small cap lagged most of the other major averages. However, if you are going to use a model you cannot second guess it. The whole point of using models is to impose discipline. Furthermore, there are reasons to believe small cap can continue to lead, especially if the market follows its normal seasonality and rallies into year end. Northlake’s model is picking up the excellent breadth on this rally and a sustained high level of bullish sentiment that occurred after a period of bearish sentiment. These technical factors plus continued growth in the economy historically have favored small caps.
The new signal is a weak one, just barely over the line from mid cap. Ultimately, I think the big call until yearend is small or mid cap vs. large cap. Small and mid cap tend to correlate more highly with each other than either does with large cap.
The new growth signal initiated in October looks a little stronger this month. Growth is favored due to trend indicators, recent action in foreign exchange markets, and attractive relative valuation of growth stocks vs. value stocks.
Last month, the mid cap signal outperformed small cap but slightly lagged large cap. Growth and value produced almost identical returns in October, each matching the S&P 500. So far this year, the Style model has matched the S&P 500, while the Market Cap model slightly trails the benchmark.
IWF and IWM 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. Regulatory filings can be found at www.sec.gov.