After a two month run at large cap, Northlake’s Market Cap model shifted to mid cap for August.  As a result, Northlake client positions invested in the models have sold the S&P 500 (SPY) and reinvested in the S&P 400 Mid Cap (MDY).  There is no change to the large cap growth signal coming from the Style model.  The Style model continues to strongly favor large cap growth.

The new mid cap signal was triggered by the shift of two external indicators from favoring large cap to favoring small cap.  The market sentiment factor moved as a result of very high pessimistic readings of investors’ market views that reverse late in the month.  The idea here is that when investors become overly pessimistic and begin to reverse their views the best performing sector will be more aggressive small cap companies.  The other factor that changed concerns valuation and is finding that small cap stocks look better on a measure that considers earnings yield.  Earnings yield is the inverse of the P-E ratio.  Think of it as measuring how many dollars in corporate earnings you receive for each dollar you pay for a stock.  Large cap company earnings are more sensitive to strength in the U.S. dollar and the collapse in oil and commodity prices.  Thus, on a relative basis, small cap companies are now looking more attractive.  These shifts were not strong enough to move the Market Cap model all the way to small cap from large cap.  Keep in mind that the model is built to provide a stair step approach moving from small to mid to large cap and vice versa.  Only extreme one month changes in market levels and economic data would shift the model from large to small or small to large, bypassing mid cap, in a single month.

The Style model shows no signs of shifting from large cap growth.  Out of 14 factors that contribute to the model, all but two presently favor growth.  Two factors analyzing momentum moved from value to growth for August.  This is not a big surprise given the massive outperformance for growth stocks recently.

The shorter than usual two month stay at large cap for the Market Cap model provided a small amount of value added.  During June and July, SPY fell by about -0.3% but that is better than a dip of -1.5% for mid caps and -0.8% for small caps.  The growth signal that has been in place since 11/1/14 continues to perform superbly.  During July growth indices produced returns ranging from +0.3% to +3.0%, while value indices fell by -0.2% to -3.3%.  Since 11/1/14, the growth signal has produced a positive return of over 12% vs. a virtually flat performance from the alternative value indices.

MDY 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.