Market Cap Model Volatility Continues With Mid Cap Back In Favor

Includes: IWM, MDY, SPY
by: Steve Birenberg, CFA

Due primarily to trend and technical indicators, Northlake's Market Cap model shifted from small cap to mid cap for May. As a result, all client positions following the model previously invested in the Russell 2000 (NYSEARCA:IWM) have been sold and proceeds reinvested in the S&P 400 Mid Cap (NYSEARCA:MDY).

This change continues an unusually volatile period for Northlake's models which seem to be struggling with inconsistent data on the economy, abnormally low interest rates, and a stock market that continues steadily higher even when the news flow is mixed. The Style model has held its own this year, matching the market's big gains, even with higher than normal rotation between growth and value. The Market Cap has not performed as well, especially last month when the IWM actually fell even as the rally continued and the S&P 500 gained almost 2%. Small caps are more volatile and usually lead the market in either direction. If you had told me the S&P 500 would be up 2% in April and the Market Cap model was signaling small cap, I would have been excited, expecting a big gain in small gains as the benefit of their added volatility kicked in. Instead, the caution on the part of investors reflected in lots of disbelief in the market's rally was reflected with buying concentrated in the perceived safer large cap stocks. As a result of April's misfire on small caps, the Market Cap model trails the S&P 500 by approximately 2% so far in 2013.

There were few changes in the underlying indicators of either model for May. The shift to mid cap emanated from the technical and trend indicators which are heavily influenced by the actual movement in the indices. Since small caps lagged in April, they became less attractive from a chart perspective and that was enough to move the model to mid cap. Over in the Style model, there was very slight movement toward growth as insider trading activity is now neutral between growth and value after previously favoring value. The Style model reading is still pretty strongly favoring value and I would expect June's reading to again to be value.

Disclosure: 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