Northlake's Market Cap and Style models begin 2012 as they ended 2011, favoring Mid Cap and Growth. Both themes struggled in December but underlying factors in the models remain in place. As a result of the latest signals, Northlake clients invested in the models will continue to own the S&P 400 Mid Cap (MDY) and the Russell 1000 Growth (IWF).
The Mid Cap signal remained in placed despite some changes to factors underlying the model. The recent upturn in consumer confidence shifted that indicator in favor of small caps. Also shifting toward small caps was the U.S. dollar indicator. Dollar strength presents a headwind for large caps, although this factor is not unusually strong. On the other hand, the year end market surge was led by large caps shifting the trend and technical indicators toward large caps. Overall, balance remains between indicators favoring large cap and those favoring small caps, so the model remains in mid cap mode.
There were no changes to the signals from the indicators underlying the Style model. The model remains firmly in growth territory.
Both models struggled in December, producing barely negative returns against a gain of almost 1% for the S&P 500. There is no obvious explanation for the poor performance of mid cap, especially since small cap was unchanged. The two are normally well correlated. Growth lagged due a weak month for technology stocks. The technology-dominated NASDAQ fell close to 1% last month due to worries about the lingering impact of floods in Thailand on supply of critical components. Concern over demand also rose, fueled by a disappointing earnings report from Oracle (ORCL).
For 2011, both models produced disappointing results, declining approximately 2.5%. The Market Cap model was in mid cap mode almost all year and its return tracked the S&P 400 Mid Cap index. The Style model favored value until the fall when it switched to growth. The switch was timely until December when tech stocks fell and took a took a big bite out of growth.
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.