It was John Roque who taught me this so many years ago. At least a decade if I had to guess.
We’re NOT in a reversion to the mean business. This is a reversion BEYOND the mean business.
In other words, assets don’t just get back to what is “average”. They tend to overshoot. And that’s the norm, not the exception.
This mean reversion we’ve seen in energy could be just that, a reversion back to the average. But if I’ve learned anything over the years, these things tend to overshoot.
We’ve been very vocal about this Value rotation, of course. But coming into the weekend, the big question I pose to myself, my team, and the market for that matter, is this:
Will Energy run into trouble at this logical level? Or will it not care what JC thinks is a logical level?
Look at all that former support from the past 5 years. Will former support turn into resistance, like we’re taught in our polarity principles?
Or will it rip right through it like Crude Oil did?
That’s the big question for me.
So as we continue to weigh the evidence, we come up on this next chart, which shows the Equally-weighted Energy Index compared to the Market-cap weighted index.
If we’re wondering what the Cap-weighted Index Fund will do, isn’t it interesting to note that the broader, more balanced version has already gotten above those former lows, just like Crude Oil did?
The breadth thrusts keep coming in too.
Remember, these are the types of things we see early in cycles, not near the end of them.
Very aggressive expansions in the new highs list are things we saw in Small-caps, and many other areas of the market last June and even in November. Now they’re showing up in Energy.
Not only is this a classic sign of Sector rotation, which as we always say, is the lifeblood of a bull market, but it’s also further evidence that we’re still early in the cycle. The common sense answer, of course, is that this is year 2 of the bull market. The rotation and recent breadth thrusts are consistent with that thesis.
And what’s so so interesting to me that I don’t think is getting talked about enough is just how little exposure the average investor has to this group of stocks.
It’s almost none.
Passive investors have been getting killed, and if Energy is in fact the leader we think it is, the situation for the passive is only going to get worse.
Energy represents just 2.8% of the entire S&P500.
Energy represents 0.00% of the Nasdaq100.
It represents 0.09% of the Large-cap Growth Index.
Only 2.6% of the Small-cap Russell2000 Index
2.1% of the Dow Jones Industrial Average.
1.5% of the Mid-cap400 Index
And you’re not even getting it in Emerging Markets as $EEM is still only 4.6% Energy. The $EFA, which is developed outside of North America is only 3.7% Energy.
These are some of the most popular benchmarks for Passive Investors, so it’s quite obvious why they’re losing.
And again, I think it’s just getting started.