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September 03, 2013

Despite Market and Model Volatility, Mid Cap and Value Still Favored

Despite a number of changes in the underlying indicators and a volatile month of trading for the market in August, here were no changes to the signals from Northlake’s Market Cap and Style models for September. As a result, client positions following the models will again be held in the S&P 400 Mid Cap (MDY) and the Russell 1000 Value (IWD). The underlying movement, without a change in the favored theme, are a good example of the “weight of the evidence” approach used by Northlake’s models.

Within the Market Cap model, three indicators shifted in favor of large cap, while one moved toward small cap. Last month, the model was teetering toward small cap so despite the underlying shifts in favor of large cap, there was not enough movement to shift the entire model. The three indicators shifting toward large cap were advisory service sentiment, NYSE Breadth, and the trend indicators. All three indicators reflect the peaking momentum in the market after it reached all-time highs in July. The technical indicators look for turning points after major moves and while there is no way to know if a peak has been reached, the decline since mid-July suggests momentum has been broken and moving to less volatile large caps makes sense. The indicator moving in favor of small cap is the U.S. Dollar. The dollar remains a fairly strong to the advantage of small caps that have lower international exposure and thus less issues with their products and services losing competitiveness and the negative translation impact on the financial statements.

The Style model saw two indicators move in favor of the still working value signal and one moved in favor of growth. The consumer/cyclical ratio and coincident indicators moved from growth to value signals and the trend indicators from value to growth. The consumer/cyclical ratio reflects a rough month for consumer stocks as numerous retailers reported weaker than expected sales and indicated concern about the back-to-school season. Consumer stocks are mostly in the growth category so this relative performance helps value. Coincident indicators show the economy is still moving along in its recovery. This is good for more cyclical stocks that make up value. The trend indicators are responding to a month when technology stocks, the largest component of growth, performed very well. For example, the technology heavy NASDAQ was down less than 1% last month while the S&P 500 fell more than 3%.

Last month was slightly negative for the models performance. Both mid cap and value fell slightly more than the 3% decline in the S&P decline. This differential was small, however. The bigger shortfall was missing the outperformance of growth stocks which would have limited overall portfolio declines. Fortunately, cash reserves and good performance from a number of Northlake’s media, entertainment, and technology stocks helped client portfolio’s in August.

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

Posted by Steve Birenberg at September 3, 2013 12:03 PM in Models