It's the LACK of Exposure

April 24, 2024

Stock prices don't move based on "fundamentals".

Prices move based on positioning.

When investors are primarily on one side of a market, the pendulum swings to the other extreme.

One of my heroes John Roque said it best, "We're not in a reversion TO the mean business, we're in a reversion BEYOND the mean business".

In other words, from extremes in positioning, the market doesn't just go back to the average positioning. It tends to continue towards the other extreme.

This is the situation we currently find ourselves in as investors.

Look at the Energy Sector relative to the S&P500 over time. I also overlaid the Energy weightings in the S&P500 for each period.

Back in 2008, for example, the S&P500 was almost 16% Energy.

By 2020, it was 2%.

Even today, the S&P500 has less than a 4% weighting in Energy.

Do the math: This trend is just getting started.

So even if Energy just gets back to a 10% weighting, that's still almost a triple from here.

Energy getting back to its highs over the past few decades would get it back above a 15% weighting.

Again, it's now just 3%.

But when you go back and study history, you'll find that these trends in Energy weightings for the S&P500 coincide with bigger trends for commodities.

And as this unwind is just getting going in Energy, you can see Gold already breaking out to new all-time highs.