There were no changes to Northlake’s Market Cap and Style models for May. The Market Cap model continues to flash an extremely strong signal favoring large caps. The Style model continues to flash a weak signal in favor of value. As a reminder, these models are designed to predict relative performance and have minimal predictive ability for the stock market direction. The latest signals leave my exposure in the S&P 500 (SPY) and the Russell 1000 Value (IWD).
There was almost no movement in the factors underlying the two models this month. The only change was a shift to small cap from large in the NYSE Breadth factor reflecting steady, if unspectacular improvement in breadth during April’s market rally. Despite this change the overall model actually moved a touch deeper into large cap territory. The large cap signal has not been this strong since the end of 1995. Since the start of my data in the spring of 1979, there have been only about a dozen monthly readings more strongly in favor of large cap outperformance. The current reading will take several months to switch to a small or mid cap signal even if the underlying factors begin to move in favor of small caps. I think it is a good bet that the model won’t shirt again to small caps without a large move in either the stock market or the economy. It seems most likely those moves would be to the downside as the small caps are favored at extremes rather than in moderate or soft landing scenarios….

The Style model, on the other hand could easily shift over to growth as soon as next month. The current value signal came into effect in February but has been a weak signal for all four months. The latest movement was in favor of growth and it won’t take much more to turn the signal for June.
The large cap signal first went effect in February. For the three months ending April 30th, the S&P 500, as represented by SPY is up 3.2% vs. a gain of 1.8% for the Russell 2000, as represented by IWM. Mid cap has actually been the best performing category over the 3-month period so the signal has not been perfect.
The value signal has not been very accurate so far but since I have limited client exposure to large cap value the damage has not been great. For the three months, large cap growth (IWF) is up 3.1% and large cap value (IWD) is up 3.05%. This period continues a trend of performance compression among growth and value that has been in place for most of the past year. In the small cap area, growth has outperformed value considerably over the past three months. Fortunately, the strength of the Market Cap signal has kept me out of small cap value.