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October 01, 2012

Large Cap and Value Still Favored for October

There were no changes to the signals from Northlake’s Market Cap and Style models for October. The new large cap signal remains in place for a second month and the value signal is now entering its fourth month. With no changes for October, clients will continue to own the S&P 500 (SPY) representing large cap and the Russell 1000 Value (IWD) representing value.

The underlying indicators in the Market Cap model shifted in favor of small caps based on the latest data but not far enough to change the signal. However, another similar month in October would move the model back to mid cap territory. The main shift in favor of small cap occurred in the trend indicators which picked up a better month for small and mid caps during September’s market rally.

A similar situation exists in the Style model. There was a shift toward growth from value but not enough to cause the overall model to change for October. Once again, if the model were unchanged in in October, the following month would see a change. In the Style model, the U.S. dollar indicator moved from value to growth reflecting the weak performance of the dollar in September a the Euroe rallied strongly.

Overall, the models indicate that the economy is growing slowly and the market is trending consistently with a high degree of correlation among various market themes. This type of environment often sees more volatility in the model signals as has been the cause in recent months.

During October, the shift form mid cap to large cap worked well. Mid cap, as represented by the S&P 400 Mid Cap (MDY) rose just 1.9% while the S&P 500 (SPY) gained 2.3%. The Style model also had a good month with Value gaining 2.5% against just 1.1% for Growth. For all of 2012, the Market Cap model has struggled and lags the benchmark S&P 500, while the Style model is beating the market. The Market Cap model has struggled with an environment that historically has favored small caps while investors focused on large caps instead. I think the many risks apparent in the investment landscape have bullish investors looking at presumably safer large companies.

Disclosure: IWD and SPY are widely held by clients of Northlake Capital Management, including in Steve Birenberg’s personal accounts. MDY is held in selected Northlake-managed accounts. Steve Birenberg is sole proprietor of Northlake, a registered investment advisor. Regulatory filings can be found at www.sec.gov.

Posted by Steve Birenberg at October 1, 2012 03:32 PM in Models