There were no changes to Northlake’s Market Cap or style models for March. Client portfolios remain long mid caps and value, which I execute using the exchange trade funds representing the S&P 400 Mid Cap (MDY), the Russell 1000 Value (IWD), and the Russell 2000 Value (IWN). Clients continue to own $3 in IWD for every $1 in IWN, a slight bias against large cap in the style allocation. The long-standing mid cap signal, now in place for six consecutive months is the reason I am making a modest relative bet against large caps.
Last month, the model signals offered mixed results. The mid cap signal from the Market Cap model was wrong. As measured by the ETFs or the actual indices, mid caps were the worst performing index, trailing large caps and small caps by up to 1% depending on the particular index or ETF being measured. On the other hand, the Style model flashed an accurate signal as the value ETFs slightly outperformed the growth ETFs….

Year to date, the mid cap signal has been correct and has produced a return in excess of the S&P 500. However, a small cap signal would have provided even better returns. For the trailing five months that the mid cap signal has been in place, mid caps and small caps have returned about 9% on a price only basis, comfortably ahead of the price only return on the S&P 500 of 4.6%.
The Style model has not offered any excess return on a year to date basis as the small excess return for value over growth merely regained the lost return in January when the model flashed an inaccurate growth signal.
There was little underlying change in the models for March, consistent with the lack of change in the overall signal. The strength of the mid cap signal from the Market Cap model was almost identical for March as it was for February. The only factor that shifted was advisory service sentiment which moved from favoring small caps to a neutral reading. This factor attempts to identify initial shifts from overly bullish or bearish sentiment readings. Presently, the sentiment readings are muddled, which is pretty consistent with the discussion on Wall Street, in my opinion.
None of the factors in the Style model shifted for March. However, the model did register a stronger value reading. Narrowing credit spreads, the continuing flattening or inversion of the yield curve, and strength in the U.S. dollar, all contributed to the stronger value reading for March.