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November 04, 2005

November Model Signals

The November signals from the market cap and style models Northlake uses to allocate ETF-dedicated funds were unchanged from October. Consequently, no trades were done for November and client portfolios continue to own Mid Cap and Value. Specifically, clients own the S&P 400 Mid Cap (MDY) for market cap exposure, while style exposure is split 75%/25% between the Russell 1000 Value (IWD) and Russell 2000 Value (IWN)...

....There was virtually no change to the market cap model as none of the economic, interest rate, or stock market indicators shifted their individual signals. Of the ten factors, four favor small caps and six favor large caps. This is a viewed as a split decision by the model and defaults to Mid Cap.

The style model sustained a Value signal for the second consecutive month as the internal reading moved much more decisively in favor of Value. A slight uptick in the ratio of growth P/E's to value P/E's moved that factor from the growth camp to the value camp as relative growth P/E's are now at a very slight premium to their long-term average as measured by the Russell 3000. Several other factors moved to modestly stronger readings for value with strength in the trade-weighted dollar on a year-over-year basis making the biggest move. The style model now is firmly in Value mode but it is not yet at a reading where relative performance has historically been the best.

Performance of the models wasn't very helpful in October as MDY trailed the S&P by about 120 basis points and Value slightly lagged growth and fell about 10 basis points short of my S&P 500 benchmark (worth noting is that the futures fell sharply right after the close on Monday which cost MDY 40 basis points relative to the S&P 500 that was regained first thing Tuesday). Year to date the models have been mixed with the market cap model about 15 basis points ahead of the S&P 500, while the style model is 170 basis points ahead of the S&P 500. Much of the outperformance for the style model has been due to its overexposure to small cap for most of the year. All returns are before dividends and commission costs but include slippage.

Most of this year, especially since spring, both models have been sending weak signals and have sat in the area where the historical performance is decent but not great. Northlake follows the models no matter what their strength is but I'd be a lot happier if the signals were stronger. I think the weak signals are indicative of the muddling market we have had all year with the S&P 500 trading in a tight band of plus or minus a few percent of unchanged.

Posted by Steve Birenberg at November 4, 2005 08:58 AM in Models