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December 03, 2012

Back to Large Cap

For the month of December, Northlake's Market Cap model shifted back to large cap. As a result, client positions dedicated to the Market Cap model sold their holdings in the S&P 400 Mid Cap (MDY) and reinvested the proceeds in to the S&P 500 (SPY). The Style model continues to favor value, so client positions in the Russell 1000 Value (IWD) will be held at least another month.

This marks the third month in the last four that large cap has been favored by the Market Cap model. November saw a one month stay at Mid Cap. As a reminder, when the models are in transition, there is often more volatility in the monthly signals. When the model shifted to large cap in September, it was the first time in that mode since December 2009 and only the third time since the end of 2007.

After such a long run favoring small and mid caps, the model does seem to be suggesting that the run for higher risk, smaller market cap companies could be coming to an end. This makes sense given a long period of sub par but positive economic growth, interest rates that can't go any lower, and general aversion to risk by investors given the ongoing worries about global economic growth prospects. Time will tell if the shift to large caps is the start of a new major trend. In the meantime, with the fiscal cliff approaching and the politicians still bickering, I like the idea of spending the last month of the year in the lower risk large cap index.

November's one month stay at mid cap was profitable by a little less than 1% but added minimal value compared to the S&P 500 and Russell 2000, which were also up a little less than 1%. In the Style model, the value signal was inaccurate in November as IWD was declined very slightly for the month, while the Russell 1000 Growth (IWF) rose 1.75%. Despite the miss in November, the value signal has been a good one since it first appeared for August 2012. Since then, IWD is up 4% vs. a gain of 2.75% for IWF. November's performance reflected a bounce back in large cap tech stocks, which led the market lower during the October/November correction.

Disclosure: SPY and IWD are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve is sole propreitor of Northlake, a registered investment advisor. Filings can be found at www.sec.gov.

Posted by Steve Birenberg at December 3, 2012 11:15 AM in Models