« Good Quarter, Good Outlook For Central European Media Enterprises | Main | CETV Issuing Convertible Bonds »

March 03, 2008

March 2008 Model Signals

There were no changes for March to Northlake's Market Cap and Style models that I use for ETF allocation. The signals remain mid cap and growth. The mid cap signal remains a weak one that could shift back to large cap next month. The growth signal is moderately strong and got a little stronger last month. It is strong enough that it seems unlikely to shift to value next month. Entering March I thought a shift to value was possible. Given the current model signals, I continue to own the S&P 400 Mid Cap (MDY) and the Russell 1000 Growth (IWF) in client and personal accounts. As always, special thanks to Ned Davis Research who developed the original models and continues to maintain them.

There was little movement in the underlying indicators in either model. The only shift in the Market Cap model was the Advisory Service Sentiment indicator moving from small caps to neutral. The model is picking up the most recent drop in sentiment but also now shows that bearish sentiment is high enough to trigger a move back in favor of small caps next month. The concept behind this indicator is that small caps are favored when bearish sentiment reaches an extreme and then reverses. The extreme is in place. The reverse is not. Coming off an extreme bearish sentiment bottom, you want to own small stocks for the benefit of the beta effect.

There was a similar lack of movement in the underlying indicators in the Style model. The only indicator to shift was Insider Activity which moved to growth from a neutral reading.

Overall, the indicators reflect a slowing economy that favors large caps and growth, an interest rate environment that increasingly favors small caps, and stock market internals that favor large caps and growth. The weak dollar also favors large caps and growth. The mid cap reading is a result of mixed readings on market cap....

....The mid cap signal went into effect on January 1st. So far it has been a good call. Through the end of February, MDY (mid cap) has outperformed the S&P 500 (SPY) by about 156 basis points. February was particularly favorable to MDY, which fell 1.1% against a drop of 2.6% for SPY.

The growth signal has been in effect since July 1, 2007. For the entire period it has been a great call with growth (IWF) down 8% and value (IWD) down 15.5%. Year to date, value has outperformed growth by 150 basis points thanks strong relative performance in January when the Fed aggressively cut rates. Growth made a comeback in February with IWF falling just 1.7% against a 3.9% drop for IWD.

Posted by Steve Birenberg at March 3, 2008 01:52 PM in Models