For the first time since February, there has been a change on Northlake’s Core and Explore ETF models. The Style model has moved to Value after spending 5 months at Growth. The new Value signal is weak, just barley in Value territory on Northlake’s 0 to 100 scale. However, five of the nine underlying indicators now favor value and a sixth is rated neutral. The trend toward value has been in place for several months so this move comes as little surprise.
As a result of the new signal, all client positions in the Russell 1000 Growth (IWF) were swapped into the Russell 1000 Value (IWD). The effect on client portfolios is to shift exposure from technology, health care and consumer sectors to financial services, utility, and energy sectors. The shift is anticipating a second half recovery in the economy that favorably impacts the more cyclical parts of the economy.
The Growth signal since the beginning of February was very accurate and contributed favorably to client portfolio performance. While clients owned IWF, it gained almost 19% against an increase of less than 12% for the IWD. This is exactly how the model is supposed to function – capturing incremental performance in a major trend.
There was no change to the signal from Northlake’s Market Cap model. It remains firmly in small cap territory although the signal has weakened slightly for two consecutive months. The small cap signal also anticipates better times ahead for the economy and continued improvement in credit market conditions.
Small caps, as represented by client exposure to the Russell 2000 (IWM) outperformed the S&P 500 in June for the second consecutive month. SO far in 2009, the Russell 2000 is up 3.6% vs. a gain of 2.5% for the S&P 500. Thus, the Market Cap model has done its job this year. The small cap signal has been in place since September 2008. During that time, small caps have lagged large caps by a little less than 2%. The small cap signal was early in anticipating an improved economic and stock market environment. Performance especially suffered during the initial portion of the market crash in the final quarter of 2008.
Disclosure: IWD and IWM are widely held by clients of Northlake Capital Management including in Steve Birenberg’s personal accounts.