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June 03, 2008

June 2008 Model Signals

There were no changes to Northlake's Market Cap or Style Model for June. The Market Cap model continues to flash a Mid Cap signal while the Style model remains firmly in growth mode. As a result, client positions in the S&P Mid Cap 400 (MDY) and the Russell 1000 Growth (IWF) are being maintained.

The Market Cap model saw no changes in any of the underlying factors. However, the model showed a slight shift toward small caps as several of the underlying indicators moved toward stronger small cap readings. In particular, relatively weaker earnings performance from large caps, plunging consumer confidence, weaker growth in coincident indicators of economic growth, and technical trend indicators moved in favor of small caps. The one indicator moving in favor of large caps is the rise in the general level of interest rates. This is a powerful indicator and should be closely watched. The Market Cap model has favored Mid Cap every month this year except for April.

The Growth model continues to register a reading firmly in favor of growth. This model also showed little change for June with only one underlying indicator changing its signal: insider activity moved from neutral to favoring value. Until economic growth beings to accelerate or the dollar strengthens, I expect the growth signal to remain in place. One indicator in the news and close to a value signal is the yield curve. An unusually steep or inverted yield curve favors value and the recent steepening of the curve has put the shape close to a value signal. The Style model has favored growth every month since July 2008.

Both models sent accurate signals in May....

....The S&P 400 Mid Cap was the best performing index last month, producing a gain of 5.4% as measured by MDY. The S&P 500 gained just 1% while the Russell 2000 was up a little under 5%. Growth outperformed Value last month with the both small cap and large cap Russell growth indices gaining around 4% vs. no change for large cap value and a gain of 1.5% for small cap value. Strength in technology and weakness in financials caused the performance dispersion.

So far this year, the Market Cap model has also worked well, producing a return of over 1% vs. a loss of more than 4% for the S&P 500. The Style model has also outperformed with IWF falling a little over 2% versus a drop of more than 4% for the S&P 500. Since the growth signal went in place last July, IWF is down just 1% vs. a loss of 13% for the Russell 1000 Value (IWD).

As a reminder, these models were developed by Ned Davis Research and are based on a consensus approach. Each underlying indicator has predictive value for relative performance of small vs. large caps or growth vs. value. How the underlying indicators line up in favor of one theme or the other determines the monthly signal.

Posted by Steve Birenberg at June 3, 2008 09:12 AM in Models