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March 01, 2013
Model Volatility Continues with Small Cap and Value Now Favored
Northlake’s models continue to send volatile signals. Just a month after the unusual occurrence of both the Market Cap and Style model shifting their signals, it happened again for March. The new signals favor small cap and value. As a result, client positions dedicated to the models were adjusted. The S&P 400 Mid CAP (MDY) was sold, with proceeds reinvested in the Russell 2000 (IWM). In addition, the Russell 1000 Growth (IWF) was sold and proceeds were reinvested in the Russell 1000 Value (IWD). Right now, the new small cap signal is not a strong. Should it strengthen in coming months, IWD could be sold in favor a value index with more or exclusive small cap exposure.
The volatility in the models mirrors volatility in the recent economic statistics and the stock market. As noted in prior monthly updates, the economy and stock market transitioned form the cyclical recovery off the 2008/2009 crisis low points to a more sustainable, I might even say normal, environment. However, the continued overhang from the crisis period, reflected lately in renewed worries in Europe and ongoing problems with U.S. fiscal policy, leaves the economy performing well below usual post-recovery levels. This appears to have introduced unusual volatility in the Market Cap and Style models. Historically, the model signals average four to six month holding periods as they are designed to capture major trend shifts rather than month to month market gyrations.
Another feature of the market of late is that there has been only modest variation among returns of the different themes and sectors. This continued last month where all five our Northlake’s usual index investment returned between 0% and 1%. Last month, the switch to mid cap from large cap was not the right call but the difference in returns was than one quarter of one percent. The shift from value to growth, which lasted only one month, also was not on target but again the difference was small, just three tenths of one percent.
IWM and IWD are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Regulatory filings can be found at www.sec.gov.