Northlake’s Market Cap model moved from mid cap to large cap for April.  This is the first large cap reading since September 2017.  The Market Cap model often moves in stair step fashion from small to mid large and large to mid to small.  For December 2017, the signal was small cap, so the new large cap reading could be seen as completion of the current step function.  Interestingly, the current Market Cap reading of 12.5 is in the top 5% for large cap strength of all model readings since we started testing the data in March 1979 (on a scale of 1 to 100 where 1 would be the strongest possible large cap reading)!

Each of the internal and external components of the Market Cap model has eight indicators. Presently seven of the eight indicators (14 of the 16 total) favor large cap.  Simply put, both the stock market action and economic data are in sync in recommending large caps.  It is hard to read too much into this but it does coincide with investors expressing growing concern over the future path of the economy given news and headlines about trade wars, higher interest rates and inflation, and a more activist executive branch when it comes to oversight of major sectors of the U.S. economy.  One read could be that large caps are safer than small caps and the exceptionally strong model reading is signaling a slowdown in the economy and weaker stock market performance.  We plan to back test our model readings in the near future to test this theory.

The Style model remained at growth for a second consecutive month.  The overall reading is quite strongly in favor of growth though not at the extreme level of the Market Cap model.  Internal Style indicators are unanimous favoring growth in recognition of the strong performance of growth stocks, led by the big internet platforms until the very recent Facebook led decline.  The external indicators are split equally between growth and value indicating that economic factors are more mixed in their impact.

We never outguess our models but we do try to see if they offer insights and match our thinking.  Northlake feels comfortable with large growth stocks despite their recent sharp declines.  This is especially the case with Google and Facebook, where we could always make a valuation case as opposed to some other growth stocks. If the underperformance of growth stocks continues, it will prove the current internal indicators wrong.  In that case, we hope the short-term technical indicators, designed to pick up turning points, flip quickly and shift the model to value.

With the shift to large cap in the Market Cap model, client positions following the model that had been in the S&P 400 Mid Cap (MDY) have been sold and proceeds reinvested into the S&P 500 (SPY).  Positions in the Russell 1000 Growth will be held at least one more month.

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.