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April 01, 2013

Models Stabilize Favoring Small Cap and Value

After several months with one or both models changing signals, the April signals showed stability. For the second consecutive month, the Market Cap model is recommending small cap and the Style model is recommending value. The small cap signal remains borderline but the value signal has moved into strong territory. This suggests that value will hold firm for a few more months, returning to the usual 4-6 month holding period for new signals, while the small cap signal could change. As a result of the updated models, Northlake clients positions dedicated to the models will be maintained in the Russell 2000 (IWM) and the Russell 1000 Value (IWD).

Last month I mentioned that volatility in the model signals reflected the sub par U.S. economic recovery off the 2008/09 crisis lows. Economic statistics released in the past month show some promise for development of a more normal economic recovery. It is too soon to conclude anything but the models may be reflecting the transition to a normal economic recovery. I am wary, however, as issues in Europe, China, and the U.S. remain volatile and hard to predict.

Last month the then new signals worked well. Small caps outperformed large caps by over 1% and both growth and value matched the market's gains. So far this year, the Style model has produced a return in excess of the S&P 500 and the Market Cap model has matched the market's big, early year gains.

Posted by Steve Birenberg at April 1, 2013 09:15 AM in Models