Mid Cap and Value Again in September

by: Steve Birenberg, CFA

There were no changes to Northlake's Market Cap and Style models for September. The Market Cap model is recommending Mid Cap for the third straight month and the Style model is signaling Value as it has since July 2009. With no changes this month, Northlake client assets dedicated to the Core and Explore strategy will continue to own the S&P 400 Mid Cap (NYSEARCA:MDY) and the Russell 1000 Value (NYSEARCA:IWD).

The Mid Cap signal is slightly stronger this month as the Market Cap model continues its steady drift away from recommending high risk small caps. Eventually this model will shift to large caps unless economic activity and the stock market both firm up. The model continues to pick up softening but still positive economic growth and stock market trends suggesting less risk is better. The slight movement away from small caps to a stronger mid cap signal for September is the result of technical indicators picking up deteriorating stock market breadth over the past few months and lagging performance by small cap stocks.

The Value signal remains very strong for September, matching its most value-oriented reading this cycle. There was no movement in any of the underlying indicators this month. The Style model is picking up on slowing but still positive economic growth. This environment offers industrial companies good profit opportunity as has been evident in the very strong earnings growth reported over the last few quarters.

Neither model added much value last month. MDY lost slightly more than the S&P 500 last month while IWD held up a bit better. Over the past two months, the new Mid Cap signal has barley lagged the S&P 500 but has outperformed the small cap Russell 2000 (NYSEARCA:IWM) which it replaced. IWD has performed well in its thirteen month run, earning more than the comparable growth index and the S&P 500.

Disclosure: MDY 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, an SEC-registered investment advisor. Steve is also co-manager of the Entermedia Funds, long/short equity hedge funds focused on media and communications.

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