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June 04, 2007

June 2007 Models

There were no changes to Northlake's Market Cap and Style models for June. The signals remain large cap and value. The large cap signal remains very strong, while the value signal remains weak. As a result of the updated signals, there are no changes to the holdings in the portion of the portfolios I manage using these models. Clients continue to own the S&P 500 (SPY) and the Russell 1000 Value (IWD).

This is the fifth consecutive month that the market cap model has flashed a large cap signal. The average holding period for this model based on data since 1980 is four to six months. For the last several months, the signal has been very strong favoring relative outperformance of large caps over small caps. In fact, there have only been 13 months with stronger signals in favor of large caps out of the 339 months that I have data on the model. All ten indicators in the market cap model are flashing a large cap signal. The model is picking up a moderately growing and slowing economy, rising interest rates and the recent technical deterioration of the Russell 2000 versus the S&P 500.

This is also the fifth consecutive month that the style model has flashed a value signal. The average holding period in the style model is five to seven months based on data since 1981. The value signal remains a weak one with just five of the nine indicators in the model flashing a value signal. Flipping of just one indicator or changes in the strength of one or two underlying indicators would be enough to change the model to a growth signal....

Performance of the models has been mixed since the current signals have been in place. The market cap model has been pretty good with the S&P 500 slightly outperforming the Russell 2000 since February. For May, the Russell 2000 slightly outperformed the S&P 500. I take comfort in these results given that one would expect the beta effect to cause small caps to outperform with the market in such a strong uptrend. In my opinion, the large cap signal has allowed my clients to earn as good as returns as the Russell 2000 while taking less risk. The model has not been perfect, however. Mid cap has been the pace to be over the past four months. The S&P 400 (MDY) has outperformed the S&P 500 by about 350 basis points. I believe the combination of private equity deals and strong performance from energy stocks has driven the outperformance of mid caps.

The weak signal from the style model in favor of value has fairly reflected the compression of performance among value and growth over the past four months. During that time, as has been the case for most of the past year, there has been very little variance in the performance of the major growth and value indices. In fact, over the last four months, the returns have been almost identical. For May alone, growth outperformed value.

Posted by Steve Birenberg at June 4, 2007 10:26 AM in Models