For the month of April, Northlake's Market Cap signals switched from favoring small cap to favoring mid cap. As a result, client positions in the Russell 2000 (IWM) have been swapped into the S&P 400 Mid Cap (MDY). The Style model remains on a growth signal so client positions in the Russell 1000 Growth (IWF) will be maintained for at least another month.
The shift from small to mid cap is the result of a combination of factors. As mentioned in prior updates, the small cap signal was relatively weak for both months it was in place. A small shift in the underlying model factors could easily shift it back to mid cap. This is exactly what happened as the technical and trend indicators favoring small cap weakened and the uptick in interest rates this past month is a negative for relative performance of small caps.
The technical and trend indicators reflect that small cap stocks very slightly lagged large cap the past of couple of months. Interest rates are pretty straightforward. Small companies have less access to credit as a general rule so any uptick in interest rates, even from very low levels, tends to focus investors toward larger companies unaffected by possibly tighter credit conditions.
During March, the models put in a mixed performance. The small cap signal neither added nor subtracted value as the Russell 2000 and S&P 500 each rose a little over 3%. The growth signal continued to perform well as IWF rose 3% ahead of the 2.5% gain for the comparable value index. For the quarter, the story was much the same as the Market Cap model produced a return in line with the S&P 500, while the growth model beat the S&P 500 and the value index. Growth is benefiting from superior performance of technology stocks over the past few months.
Disclosure: MDY is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. IWM is a core holding in select accounts at Northlake Capital Management, LLC. Steve is sole proprietor of Northlake, a registered investment advisor with the Illinois Securities Department. IWM is a short hedge in the Entermedia Funds. Steve Birenberg is co-portfolio manager of the Entermedia Funds, owns a stake in the Funds investment management company, and has personal monies invested in the Funds.