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April 04, 2005

April Model Signals

There were only minor changes to Northlake's Market Capitalization and Style Models in the April update. Neither model changed signals from March leaving the market cap signal at Large Cap and the style signal at Value. There was continued movement in both models, with the market cap model continuing its shift toward large cap and the style model continuing its shift toward growth. The models movements did trigger a trade for Northlake clients...

...All remaining positions in the Russell 2000 Small Cap Value ETF (IWN) were sold and replaced with additional holdings in the Russell 1000 Large Cap Value ETF (IWD). This trade was triggered by the shift of the Market Cap Model toward a firmer reading for large cap. Positions in IWN have been gradually shifted toward IWD as the Market Cap Model has moved away from a small cap and mid cap signal to the current large cap signal.

Two model factors shifted from a small cap to a large cap signal for April. Both factors were in the stock market indicator basket (there are also indicators based on interest rates and economic growth). The measures that shifted were NYSE Breadth and Trend Indicators. Each of these measures looks at short and intermediate term performance of the market to try to identify emerging trends. So far this year, large cap stocks have comfortably outperformed small cap stocks, with the S&P 500 falling about 2.5% against a decline of about 5.5% for the Russell 2000 Small Cap index. The underperformance of small cap stocks went far enough to move both of these factors to large cap.

The stock market based factors in Northlake's models play an important role. They are shorter term in nature and are included to make sure that any lag from the economic or interest indicators does not get out of hand. Northlake's models function on an intermediate time horizon of six to twelve months. The goal is get the big trends generally right. If the stock market indicators improve the timing, the odds of capturing most of divergences between market cap and styles is improved.

The Style Model continued to drift away from the very strong value signal. This marks several consecutive months where the model moved in the direction of growth. There were no changes to the signals from any individual factor in the Style Model this month. Rather, the somewhat slower economic growth statistics and upward trend in interest rates has shifted a few factors away from a pure value reading. The Style Model remains firmly in value territory and would require at least two more months to trigger a growth signal if the recent drifting maintained its pace.

Posted by Steve Birenberg at April 4, 2005 01:29 PM in Models