Archive for year: 2011

Mid Cap and Growth continue to be the favored themes at Northlake Capital Management, LLC. The latest model signals for December showed some underlying but not enough to shift the signals. As a result, for at least another month, Northlake clients using the models will continue to own the S&P 400 Mid Cap (MDY) and the Russell 1000 Growth (IWF).
Looking at the individual factors underlying each model, there was some movement in favor of large caps and growth. The Market Cap model saw the breadth factor shift in favor of large cap. This reflects large cap stocks performing than better than small cap stocks over the past six months. The shift in this one factor still leaves the model solidly in mid cap territory but if another factor shifted toward large cap next month a change is possible.
In the Style model, there was also one factor shifting its signal this month. Advisory Service Sentiment moved to Growth from Value reflecting less bullish sentiment among investment professionals. In the case of the Style model, the movement was in the direction of the current signal, so the Growth signal is now stronger and in territory where it is likely to stay in place for at least a couple of more months.
The current signals have a bullish bias such that they should prove accurate if the market continues its recent rally through year end. With some more hopeful signs in Europe and continued good data on the U.S. economy, a yearend rally seems plausible. The potential fly in the ointment for the models is that any rally could be led by financial stocks which are highly sensitive to developments in Europe and include in Value. The rally that began last week has, in fact, been led by financial stocks with technology, a major component of Growth, lagging the market’s gains. In a bullish environment, technology should catch up if history is any guide.
The models put in a good performance in November although the gains over the benchmark S&P 500 were minor. The Mid Cap signal saw MDY down just ¼ of 1% against a drop of almost ½ of 1% for the S&P 500. The Growth signal did a little better with IWF falling just 1/10th of 1%.
Since the current signals were put in place the performance has been mixed. Growth has done well, down about 3% vs. a drop of over 4% for the Value. The Mid Cap signal has been off with MDY down over 2% against a drop of less than 1% for the S&P 500. Mid Cap has easily beaten Small Cap with the Russell 2000 (IWM) dropping almost 6%.
Disclosure: MDY and IWF are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor. SPY and IWM are net short positions in the Entermedia Funds. The Entermedia Funds are long/short equity hedge funds focused on media, entertainment, communications, and related technologies. Steve is co-portfolio manager of Entermedia, owns a stake in Entermedia’s investment management company, and has personal monies invested in the Funds.

There are no changes to Northlake’s Market Cap and Style models for November. Mid Cap and Growth remain the favored themes. As a result, client positions dedicated to these models and currently invested in the S&P 400 Mid Cap (MDY) and the Russell 1000 Growth (IWF) will be maintained for at least another month.
For the last few months I have been expecting the Market Cap model to shift to large cap, reflecting the weak economic outlook. Most of the model’s economic indicators already favor large caps. However, the models also contain interest rate and stock market technical components. These indicators continue to favor riskier small caps leading to an overall balanced model reading that settles on Mid Caps.
Interest rates remain unusually low driven by Federal Reserve policies to support and improve the domestic economy. Low interest rates favor risk-taking and smaller companies with less access to capital. The technical indicators are specifically included to help the timeliness of the models. The huge market rally in October kept these momentum based indicators in the small cap camp. With recent U.S. economic data looking better, I feel OK about sticking with higher risk Mid Cap for another month.
The Style model still favors growth as underlying indicator movement was modest. Strong performance from value stocks (led by financials and commodities) in October’s rally moved the technical indicators from growth to value but this was offset by economic indicators moving in favor of growth. Growth is more valuable in a slowing economy as growth companies have their own earnings drivers and are less dependent on an economic tailwind. I am comfortable with growth as technology is most likely to lead the U.S. out of its economic troubles.
The models put in a solid performance last month, reversing some recent inaccurate signals. Mid Cap rose over 13% in October, ahead of the 10% gain for large cap, as measured by the benchmark S&P 500. Value slightly beat growth, up 11.5% vs. 10.8% but both indices beat the S&P 500. The current Mid Cap signal has been in place since December during which it has lagged the S&P 500 by about 1%. The Growth signal is beginning its fourth month. Thus far, it has done well, producing a return about 1% ahead of value.
Disclosure: MDY and IWF are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor.