Northlake’s Market Cap model flipped from Mid Cap to Large Cap for February.  As a result, client positions in mid cap were sold and the proceeds reinvested into the large cap S&P 500 (SPY).  Current mid cap positions that were sold included both the S&P 400 Mid Cap SPDR (MDY) and the iShares S&P 400 Mid Cap (IJH).  Some clients may continue to own small amounts of MDY and IJH as core holdings independent of the models.  The Style model did not change for February, so client positions in the Russell 1000 Growth (IWF) will be held at least one more month.

The shift to large cap emanated entirely from the internal indicators that measure market breadth and trends.  Given the poor performance of small cap stocks in January and more generally over the past six months, this is not a surprise.  Last month five of the eight internal indicators in the Market Cap model favored large cap.  For February, all eight indicators now recommend large cap.  The external indicators that measure economic and interest rate factors remain evenly split between large cap and small cap.  Overall, the new large cap signal is moderately strong.  It could flip back in a month if the stock market broadly recovered from January’s sell-off.

The Style model remains on a growth signal and this month’s reading is more firmly in favor of growth as tow indicators shifted in favor of growth, while one moved the other way toward value.  The growth signal looks pretty strong which might be expected when the outlook for economic growth is weakening.  Growth stocks are less impacted by the economy, while value stocks are more cyclical.

Last month the models did a little worse than the market.  MDY fell by -5.5%, about 50 basis points more than the S&P 500.  MDY did save quite a bit of money vs. small caps, as the Russell 2000 fell by almost 9% in January.  Surprisingly, the Style model performed worse, falling -7%, even though it was on a growth signal when global recession worries were the primary driver of stock market weakness.  Growth massively outperformed in 2015 and one characteristic of January’s correction was that investors appeared to be selling winners and looking for a rebound in some of the most depressed sectors such as value-oriented energy and industrials.

The just completed mid cap signal had been in place since August 2015.  During that time, MDY fell by -12% against a loss of -8% for the S&P 500 and -16% for the Russell 2000.

SPY 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.