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Underlying Shifts Large But Mid Cap and Growth Survive Another Month

There are no changes to the recommendations from Northlake’s Market Cap and Style models for November.  Mid Cap and Large Cap growth remain the favored themes.  As a result, client assets invested in the models will continue to be held in the S&P 400 Mid Cap (MDY) and the Russell 1000 Growth (IWF) for at least another month.

While there is no change in the recommendation from either model, there was significant underlying movement in both models.  The Market Cap model moved in favor of small caps and the Style model moved in the direction of value.

Three indicators in the Market Cap model moved from large cap to small cap to November.  Each indicator is in the internal group and is related to stock market breadth: Stocks Above 200 Day Moving Average, Stocks Above 50 Day Moving Average, and Net New Highs.  These indicators switched in favor of small cap as a result of large and broad-based rally in the market in October.  Strong, positive market breadth is usually a leading indicator that more volatile small cap stocks will outperform and lead the market higher.

Prior to the November readings, the Market Cap model was close to moving from a mid cap signal to a large cap signal.  With the three indicators just described moving toward small cap, the overall model is now back firmly in mid cap mode.

The Style model shifted in favor of value for November and another month of similar of readings would shift the overall model to a neutral reading from favoring growth.  This is a significant change as the growth recommendation has been in place since November 2014.  Three indicators shifted from growth to value for November.  As in the Market Cap model, indicators related to stock market technicals flipped.  In the case of the Style model, the change came from leadership for beaten down industries within value during October’s big rally.  Energy, commodity, industrial and emerging market stocks led higher as investor concerns about instability and downward trends in currency and commodity markets eased.  Wall Street is less concerned about a global recession than a few months ago.

During October, the Market Cap model lagged the market’s gains.  For all of 2015, the Market model is performing in line with S&P 500.  The Style model matched the market in October as growth and value each fully participated in the rally.  Year-to-date, the Style model is performing very well, producing a price only return of almost 6% against a gain of just 1% for the S&P 500 and a low single digit percentage loss for the value indices that have been avoided.

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. 

 

 

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