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September 04, 2007

September 2007 Model Signals

For the third consecutive month there were no changes to Northlake's Market Cap and Style models. The signals remain large cap and growth. Client portfolios own the S&P 500 Spyder (SPY) and the iShares Russell 1000 Growth (IWF) to take advantage of the current signals.

The large cap signal from the Market Cap model remains one of the strongest readings in the monthly data I have going back to 1980. All ten factors covering a breadth of economic, interest rate, and stock market technical indicators are flashing a large cap signal. On their own, each factor has in the past shown predictive ability for anticipating relative performance of large caps vs. small caps as measured by the S&P 500 and Russell 2000. With the weight of the evidence from a broad array of previously accurate indicators lined up so solidly in favor of large caps, I feel very good about the prospects for large cap outperformance to continue for at least a few more months. The fact that large caps tend to hold up better when the market gets whacked is all the better given the uncertainty that remains in the market and economic outlook.

The growth signal coming from the Style model is not as strong but it is a solid reading in favor of growth. This marks the third consecutive month where the growth signal has sent a pretty strong reading. The three month stretch of solid growth readings is first since 2005, and only the third since the model started flashing value in the spring of 2000. With tech stocks acting better and concerns rising about economic growth and the balance sheets and earnings power of financial institutions (finance makes up over 30% of the Russell 1000 and Russell 300 Value indices), I also find the growth signal to be a comfortable place to be.

For July, the accuracy of the model signals was mixed....

....The Russell 2000 ETF (IWM) outperformed the S&P 500 Spyder (SPY). In Style, the Russell 3000 Growth ETF (IWZ) gained 1.5% vs. a gain of 1.1% for the Russell 3000 Value ETF (IWW).

Since the current signals were put in place, both models have been accurate. The large cap signal has been in place since February 1st. Over the seven months ending August 31st, SPY has gained 2.7% vs. a loss of -0.7% for IWM. The growth signals has been in place since July 1st. For the two months ending August 31st, IWZ is down -0.3% vs. a drop of -3.7% for IWW. The damage return differential in style indices has been consistent across market cap but there is a bigger advantage for growth in small caps.

Posted by Steve Birenberg at September 4, 2007 02:13 PM in Models