Archive for category: Models

Northlake’s models start 2025 favoring mid cap and growth.  We have held mid cap for clients using our thematic models strategy since the beginning of August.  The Market Cap model recommended small cap for December.  However, we decided to go against the model and stick with mid cap awaiting more confirmation since we considered the small cap signal to be weak.  This proved to be a good decision as small cap performed worse than mid cap in December (although both did worse than large cap).  The Market Cap model flipped back to mid cap for January based on the two-month smoothed reading we use.  The one-month reading based solely on December inputs favors large cap indicating a possible shift to large cap coming in February.

The shift toward large cap is driven by a couple factors.  First, interest rates have risen despite the Federal Reserve cutting the rate it controls over the past six months.  Higher interest rates are a negative for small and mid-cap stocks.  In general, smaller companies have more debt than larger companies, so higher interest costs are a negative for relative earnings growth.  Higher rates also raise worries about future economic growth.  Small and midsize companies as a group are more cyclical than large companies, especially given that large cap stock indices are dominated by giant technology companies that have little sensitivity to the economy.  Second, our models purposefully look at stock market trend and technical indicators in order to improve their timeliness.  Given the very weak small and mid-cap performance relative to large cap in December and a similar, long running secular trend, these indicators are now unanimous in favor of large cap.

For January, the Style model shifted from five months at neutral on growth vs. value to recommending growth.  This change was driven primarily by the technical and trend indicators where again there is unanimous support for growth.  Higher rates and their impact on investor perception of future economic growth also favor growth stocks, which do not need the economy to drive earnings and cash flow growth.

As a result of the latest signals, we are shifting current holdings in the Russell 1000 Value (IWD) to the Russell 1000 Growth (IWF).  Current positions in the S&P 400 Mid Cap (MDY) will be held for at least one more month.  We are making no changes to clients using thematic strategies as they remain well diversified across market cap and style which reflects well against the current model signals and the discussion above.

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, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov

There are no changes to the recommendations from Northlake’s Market Cap and Style models following the November update.  The Market Cap model favors Mid Cap for the 4^th consecutive month and the Style model remains neutral on growth vs value for the sixth straight month.  This type of consistency is typical as the models are designed to catch major trends rather than short-term trades.  The model signals are consistent with our favored themes that we employ for clients that do not use our models. As a result of the latest update, clients holding the S&P 400 Mid Cap (MDY), Russell 1000 Growth (IWF), and Russell Value (IWD) in our models strategy will see no changes.  Similarly, we will sit tight with our investments in industrials, financials, health care, international developed and emerging markets.  These investments and the models are consistent with Northlake’s forecast for improved stock breadth that offers similar performance for most stocks and themes.

Looking under the hood at the models, the Market Cap mode has a small shift toward small cap based predominately on inconsistent but improved breadth over the best few months.  The Style mode has movement toward both growth and value.  The internal technical and tend indicators moved toward growth, while the external economic indicators moved in favor of value. Improved breadth is evident, but large cap technology growth stocks still are the market leaders. The economic indicators moving in favor of value is reflection of continued strength in the US economy.  Although it is not a factor in either of our models, the Citi Economic Surprise index has moved sharply from negative to positive over the past few months, reflecting the ongoing strength in the economy.

MDY, IWF and IWD 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.  Northlake’s regulatory filings can be found at www.sec.gov

Northlake’s Market Cap model flipped from Large Cap to Mid Cap for December.  Client positions following the model sold holdings in the S&P 500 (SPY) and reinvested the proceeds in the S&P 400 Mid Cap (MDY).  Clients using thematic strategies but not our models already have exposure to mid and small cap through core positions and Northlake’s long held view that there is a secular opportunity for good performance from small and mid cap stocks due to their historically large valuation discount.  The Style model continues to recommend large cap, although there is movement toward value that could lead to a change as soon as next month.  For now, model strategies will continue to hold the Russell 1000 Growth (IWF), while thematic strategies not using the models maintain positions in the NASDAQ 100 (QQQ).

The new mid cap recommendation and the movement toward value are driven mostly by improved stock market breadth during the current rally.  Our commentary for much of the past year has discussed the need for more stocks to participate in market rallies if the market was going to reach new highs and beyond.  There have been several false starts, but we find the current attempt for improved breadth more promising.  In the past week, the large technology stocks sold off pretty sharply even as the market averages advanced.  This pattern shift is notable because it is also being accompanied by a big bond market rally as interest rates fall.  Investors no longer expect additional interest rate increases by the Fed and statements by Fed officials indicate there are no further increases planned in the next several months at least.  Besides a return of inflation to near the 2% goal, economic data has softened modestly.  The Fed now has to maintain a better balance between inflation fighting and supporting the economy.  This syncs with improved stock market breadth since small and mid cap and value stocks have lagged due to the elevated impact of higher interest rates on their current and future business prospects compared to large cap growth stocks.

Small and mid cap, value, and Northlake’s current sector investments in financials and value will perform better if breadth expansion continues.  Consistent messaging from the Fed showing balance between inflation fighting and economic growth will be key to turning the current shift in market action to a trend.  Importantly, better breadth with small cap, mid cap and value stocks in the lead does not mean large cap growth will continue the very recent sell off.  Rather, sustained improvement in breadth can lead all stocks higher.

MDY, QQQ, 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, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.

After a rough stretch for small cap stocks, Northlake’s Market Cap model shifted from mid cap to large cap.  The change was driven mostly by technical and trend indicators that took their cue from the underperformance of small cap stocks in the August and September correction.  The external indicators were less decisive, but one factor that looks at interest rates shifted from small cap to large cap as interest rates rose after the Federal Reserve indicated it was at or near the end of its policy tightening cycle but would keep the Fed Funds rate “higher for longer.”  Smaller companies have less access to capital and are thus more sensitive to changes in monetary policy, interest rates, and financial conditions.  Mid cap stocks lagged large cap, but held up better than small cap due to mid cap’s high exposure to energy stocks, which acted well as oil prices moved higher.

With the Market Cap model moving to a large cap recommendation, we have sold the S&P 400 Mid Cap (MDY) and reinvested proceeds in the S&P 500 (SPY) for clients invested in Northlake’s Models strategy.  The Style model still favors growth, making it seven straight months.  This has been a winning call for all thematic strategies as these client accounts maintain significant exposure to the NASDAQ 100 (QQQ).  Accounts with core positions in SPY also benefit as large cap growth stocks like Apple, Alphabet, Amazon, Microsoft, and Meta dominate the S&P 500.

More detail on market trends and investment strategies related to Northlake’s model and thematic strategies will be included in quarterly client reports that will be distributed next week.

SPY 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, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.

Northlake’s Market Cap and Style models continue to favor midcap and growth following the latest updates.  Client accounts using Northlake’s models will hold the S&P 400 Mid Cap (MDY) and the Russell 1000 Growth (IWF) for at least one more month.

The Market Cap model shifted to midcap last month and the new reading shows a stronger signal.  The growth signals remain solid but have weakened moderately.  The shifts in signal strength reflect improved market breadth during July.  Within the indicators that make up the models, it was the technical and trend internal indicators that shifted toward midcap and value, while the external factors that look at economic and interest rate data held firm for large cap and growth.

Northlake’s models performed well in July when value and small and midcap stocks performed better, keeping up with or outperforming large cap and growth.  Improved breadth also helped Northlake’s Thematic strategies that do not use our models.  These strategies had a good month thanks to good performance from small and midcap, emerging markets, and sector exposure to financials, industrials, and health care.

Northlake has been moderately bullish on the market, but we noted in our midyear Market Outlook in the latest client letters that expanded breadth was important if the rally was to continue.  July was a good start and provides hope that any market correction in the seasonally weaker August through September period proves mild and sets a strong finish to the year.

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, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.