« P&G Still Spending | Main | Time Warner 4Q08 Earnings Preview »

February 02, 2009

February 2009 Model Signals: Back to Growth

Northlake's Style model shifted from value to growth for February. Hopefully, it was only one month late. Last month was awful for value on a relative basis with the Russell 3000 Value (IWW) dropping 11.6% against a decline of just 5.6% for the Russell 3000 Growth (IWZ). The S&P 500 fell 8.6% so last month's signal proved costly. As a result of the new signal, I swapped all positions in the Russell 1000 Value (IWD) and S&P 500 Value (IVE) into the Russell 1000 Growth (IWF).

This is the first growth signal since September. Thanks mainly to the horrible performance for value in January the signal proved inaccurate. Since the value signal went into effect on the first trading day of October, IWZ was down 27.4% and IWW was down 31.8%.

At the indicator level, five factors now favor growth and four favor value. The only shift last month was the trend indicators which now favor growth. These indicators reflect the outperformance for growth in January which has swung the three and six month technical measures that comprise the trend indicators to growth. The trend indicators are included in the model to help with timeliness. One month late is frustrating especially when the last month of the prior indicator performs badly but the goal of this model is to predict relative performance over a six to twelve month period.

There was no change to the signal from the Market Cap indicator....

....It continues to flash a very strong small cap signal. Last month's call was also small cap and that also proved to be a bad call as the Russell 2000 (IWM) fell 9.7% against a decline of 8.6% for the S&P 500. Client positions in IWM and the S&P 600 Small Cap index (IJR) reflect the small cap signal.

The Market Cap model is overwhelmingly in favor of small caps with many traditionally reliable indicators all strongly in small cap territory. The bearish market environment and the unusual market and economic conditions have the mode off kilter but if we get a turn for the better with the indicators near their current position there should at least a brief period of massive outperformance for small caps if history is any indication.

I'll have a detailed look at the indicators from both models up in a column later this week.

Posted by Steve Birenberg at February 2, 2009 02:11 PM in Models