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March 03, 2009

March 2009 Model Signals and Market Comments

The bear market accelerated in February. I think three things were at work. First, economic statistics on a global basis decelerated rapidly in January and February. Second, as corporations reported their year end results they confirmed the accelerating weakness in the economy. Third, Wall Street frustration with government's response to the crisis boiled over. Put these three things together and investors see no signs of a recovery while risks of further substantial downside in the economy remain. In this scenario, selling stocks is a logical choice.

The risk in selling is that a significant rebound will occur once there are signs of stabilization in the economic outlook. Furthermore, even when the outlook is bearish stocks can overshoot to the downside. With the Dow below 7,000 I think we have overshot, the question is what will trigger a countertrend rally?

I wish I had the answer. My plan is to hold above average cash reserves, remain open to upside trading opportunities, and hold current and potential individual stock holdings to a much higher hurdle rate than usual. The initial bounce will be large and fast. I'd like to catch it but the probability of a long period of consolidation after the bounce is high so I see no reason to be too aggressive in trying to time the bottom.

March Model Signals

There was no change to Northlake's models this month. The signals remain small cap and growth. I did rotate clients from the S&P 600 Small Cap to the Russell 2000 Small Cap, reversing the trade made in December to lock in tax losses.

The small cap signal weakened a bit this month, the second consecutive month of weakening. The only factor to change this month was bond momentum which went from favoring small caps to large caps because the three month rate change in long-term Treasury bonds is now rising. Another weak month for small caps relative to large caps also contributed to the weaker signal as the trend indicators became less favorable for small caps. The Russell 2000 underperformed the S&P 500 last month by 130 basis points and is about 400 basis points behind the S&P 500 since the current small cap signal went into effect last September.

The growth signal remained at the same strength for March with no factors shifting their signals. The growth signal worked quite well last month as the swap from the Russell 1000 Value (IWD) to the Russell 1000 Growth (IWF) saved over 4%.

Posted by Steve Birenberg at March 3, 2009 02:29 PM in Models