There were no changes to Northlake’s Market Cap and Style models for September. The signals remain small cap and value. As a result, all client positions in the Russell 2000 (IWM) and Russell 1000 Value (IWD) controlled by these models will remain in place until at least the first trading day of October.
August marks the 12th straight month that the Market Cap model has sent a small cap signal. September’s signal weakened for the third straight month and could easily switch to mid cap for October. The Market Cap model generally follows a stair step approach as it moves from small to mid to large and in reverse.
Small Cap Signals Weakens
The weaker small cap signal for September came about as a result of an apparent peaking of bullish sentiment, the rebound in consumer confidence, and newly neutral trend indicators. The Market Cap model is designed to put money into small caps when the economy looks bleakest and bearish sentiment is high. With increasing signs the economy has emerged from recession and the huge rebound in stocks since the March low, a weaker signal or a shift away from small caps is logical.
The small cap signal has worked well recently. Since the end of March, the model has produced a return of 36.0% vs. a gain of 28.8% for the S&P 500 ETF (SPY). Year-to-date, the model is up 16.2% vs. 13.5% for SPY. As discussed in prior emails and quarterly letters, the shift to small caps was early this cycle due to the very fast deterioration in the economy last summer and fall and last September’s market crash. As a result, since the small cap signal has been in place, the model has produced a return of -22.6% vs. -20.4% for SPY. Obviously, the bulks of the lagging performance occurred in 2008 from September through December.
Weak Value Signal Remains
There was minimal change in the Value signal for September. The model continues to flash a weak value signal with the only underlying indicator showing any movement being the trend indicators which moved from neutral to value. The Style model continues to pick up a bottoming in economic activity and signs of renewed economic growth. Value stocks ate typically more cyclical and make sense at this stage of the economic cycle.
The shift in the trend indicator reflects a very strong month for value stocks in August. The Russell 1000 Value (IWD) gained 5.4% against just 1.9% for the Russell 1000 Growth. Improved sentiment towards an economic recovery and huge rebound in financial stocks helped value outperform. The current value signal came into place at the start of July and so far it has produced a return of 12.9% vs. 8.8 % for the corresponding growth index and 11.0% for SPY.