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December 01, 2010
Back to Value as Economic Recovery Becomes More Sustainable
Northlake's Style model shifted back to Value after a one month stay at Growth. The model is in transition with mixed signals that are straddling the line between growth and value. The monthly signal volatility is not unusual when a long running signal reaches its conclusion. Prior to last month, the Style model had been signaling value since the summer of 2009. I think the trend is clear and I expect a growth signal to re-emerge over the next few months. But I never outguess the models so as a result of the new signal, all Northlake client holdings in the Russell 1000 Growth Index (IWF) have been swapped back into the Russell 1000 Value Index (IWD).
The shift this month occurred primarily due the recent strength in the dollar. Growth stocks benefit from a weak dollar as many growth companies like technology and pharmaceuticals do much of their business outside the United States. With the prior month's growth signal being a weak one, right on the border between growth and value, one factor shifting its signal was enough to change the Style model's recommendation. Regardless of the volatility of the signals of late, the message from the Style model is that the economic recovery is moving from its cyclical bounce to a more sustainable, albeit low growth phase. This phase of the economic cycle favors growth because these companies can sustain momentum with less help from the economy than the cyclical companies that dominate value indices.
The Market Cap model remains on a small cap signals for the third straight month. As a result, client holdings in the Russell 2000 (IWM) will be held for another month. The Market Cap model did have underlying movement toward large cap. In fact, there is a good chance that next month the signal will shift to mid cap. Weaker market breadth in November, still modest levels of consumer confidence, and recently rising interest rates all contribute to the weaker small cap signal this month.
Last month both model signals provided value added. The growth signal generated a positive return of almost 1%, while value and the S&P 500 each produced a small negative return. The small cap signal was particularly good in November as the Russell 2000 (IWM) gained almost 3.5% a little higher than mid cap and much higher than the small loss for the S&P 500. Year-to-date, the Market Cap model has been extremely valuable, producing a return of 15% against just under 6% for the S&P 500. The Style model has mixed results, producing a gain about 1% ahead of the S&P 500.
Disclosure: IWD and IWM are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, an SEC-registered investment advisor.
Posted by Steve Birenberg at December 1, 2010 01:35 PM in Models
THERE WAS AN VERY ABRUPT MARKET REVERSAL. DO YOU THINK THE CORRECTION IS OVER-OR ARE WE STILL IN A CORRECTION WITH BACKFILLING AND SOME MODERATE DOWNSIDE TO COME?
WHAT DO YOU THINK OF MICC AT THESE LEVELS?
I think the correction is over. Good volume on the reversal is key. Year end rallies are common and lots of big players have missed the opportunity for good returns. Lots of pressure to jump in now.
However, we are still data and event dependent. The data in the U.S. is clearly stronger but some reports may be be less strong and cause worry. Europe is event driven. Easy to see a setback for the euro after the big bounce the last two days. Lots of computers still trading off euro so if it weakens expect selling. Overall, I expect the market to be above 1200 on S&P 500 at year end.
I added some MICC in the EnterMedia hedge funds last week at an average of $89. It acts poorly, which is troublesome, but I think there is value at current prices. Would add more in mid $80s.
Posted by: Steve at December 2, 2010 01:41 PMAFTER MOVING AHEAD AGAIN, BOTH THE MARKET OVERALL AND GOLD FOR A SECOND TIME HAVE PULLED BACK AFTER HITTING A RESISTANCE POINT [ ? A DOUBLE TOP ]. DO YOU THINK THESE ARE JUST EXPECTED PULLBACKS AFTER LARGE RUNS- OR REFLECT MORE SIGNIFICANT CHANGES IN MARKET SENTIMENT?
I AGREE THE ECONOMY SEEMS TO BE IMPROVING SLOWLY. HOWEVER, THE MARKET REMAINS EXTREMELY UNCERTAIN AND AT TIMES ACTS WITH AMBIVALENCE.
The S&P 500 has pulled back less than 1% form yesterday morning's high. I don;t think you can even classify that as a pullback worth noting. Try not to get caught up in every turn and every 1% move. The big picture remains improved. More so if the tax cut deal passes Congress. I think the market heads higher from here but remains subject to world events and fragile.