Both of the models in Northlake’s ETF rotation strategy sent new signals for February. The market Cap model shifted from Mid Cap to Large Cap and the Style model shifted from Growth to Value. As a result of these changes, I swapped client positions in the S&P 400 Mid Cap (MDY) for the S&P 500 (SPY) and the Russell 1000 Growth (IWF) for the Russell 1000 Value (IWD).
Several indicators in the Market Cap model shifted in favor of large caps this month including many of the indicators that I refer to as stock market indicators. The measure of Advisory Service Sentiment moved from small cap to large cap as it dropped below recent highs indicating that peak in bullishness maybe at hand. Not surprisingly, history shows that large caps outperform small caps when bullish sentiment roles over. The indicators that measure breadth and trend also moved in favor of large caps. These indicators are picking up the lagging performance for small caps since the lows last May and June. The final indicator to change is the 3 month measure of bond momentum. Small caps underperform when interest rates are rising so the sharp rise in rates over the past month and a half clearly favors large caps.
Only one indicator shifted in the Style model: Advisory Service Sentiment. This indicator also has had predictive ability on the growth vs. value question. Similar to the Market Cap interpretation, this indicator favors value when it appears that bullish sentiment has peaked. Once again, the interpretation is that at peaks in bullish sentiment the next big move might be lower and it will pay to lower your risk value. Value, like large caps, is the place to be when risks are higher.
Both of the just vacated Mid Cap and Growth signals were in place for three months. The Mid Cap signal proved very good as over the 3 month period, MDY gained 5.77% to 4.33% for SPY and 4.09% for IWM. The Growth signal was inaccurate but did not prove too costly. As measured by the Russell 3000 Growth and Value ETFS (IWZ and IWW), value outperformed growth by 5.35% to 4.66%. Using the Russell 1000 or 2000 Growth and Value ETFs, the returns were about the same, growth underperformed value by 50-75 basis points.