All things are not equal

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A couple of weeks ago I shared this chart, after having shared it and my trade idea a few months prior. As you can see per the latest update, it continues to produce the goods. We are trading the green line ratio tracking towards the mean, so we are going long the equally weighted S&P 500 index and short the classic market-weighted index.

After sending it and writing about the AI revolution, with the winners likely to be concentrated in a few companies versus a good spread of success across many companies, I had a crisis of confidence.

I remembered that I had built a backtest of this thesis some time ago; I found it in my archive, and I think it is well worth considering.

Let me explain what I have done:

The blue line is 50% allocated to the equally weighted S&P 500 index rebalanced every year. The green line of the equally weighted index outperforms the classic market cap index as well as the 50:50 portfolio. However, the Sharpe Ratio, while only marginal, is best for the 50:50 portfolio. The classic S&P 500 index performs the worst of the three.

In conclusion, it is very hard to tell without the benefit of hindsight which is the better index to invest in. After the fact we are all geniuses. I would strongly argue for a 50:50 portfolio as the best approach, and for reasons of mean reversion I will stick with my shorter-term call for the ratio to trade closer to the mean, as I suggest in the first chart.

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S2N observations

I haven’t spoken about the Federal Debt for some time. It is growing faster than my waistline. $38 trillion is not a small number. It is bigger than the entire GDP ($31.5tn). The point I wanted to share with you in the chart below is the green line, i.e., how much the government is spending on interest servicing the debt. It certainly isn’t the worst level the US Government has faced, but with interest rates still so low and the forecasts for debt to grow, it remains a huge threat.

Let us not forget the classic, “This Time is Different: Eight Centuries of Financial Folly” by Reinhart and Rogoff. Nothing good comes from a debt-to-GDP ratio above 100.

The chart below caught my eye and was not surprising. We are still seeing strong credit growth across all banks. Who thought FOMO was only a stock market thing? It is alive and well in the federal and commercial debt space as well. Debt is like sugar: it is legal, it is highly addictive, and it is lethal when consumed in large quantities.

The software selloff continues on the back of the AI revolution and the potential for the leading AI companies to cannibalise the enterprise software business. I have so much more to say on this subject but for the meantime I am observing and learning.

If you thought that Bitcoin volatility was through the roof, you were not alone; it turns out when looking at a rolling 1-year window, we are near the bottom.

I don’t often use technical analysis anymore, but I think Bitcoin is on the verge of a significant move lower. I will get constructive on Bitcoin again, but for now I see weakness, and that tiny bounce off the 50% retracement from the start to the top is about to be broken. I foresee the Fibonacci 61.8% retracement, which is around $47,800, as a potential level of support. Watch this space; things are about to get even more volatile.

It is not often you see the US stock market trailing its poorer cousins. We should not forget the incredible outperformance by the US over the last few years.

The next 2 charts are two sides of the same coin, just with different views. I have clearly not been paying as much attention to natural gas as maybe I should have been. I think being based in Australia during a hot summer is the reason I haven’t noticed North America’s brutal winter. I think the power demands of the massive data centre capex are probably adding to the pricing pressure. Energy is definitely an area I need to do more research on.

S2N screener alert

Gold has a massive Z-score bigger than 5 for only the 47th time in 48 years.

Silver is having a big up day with a Z-score greater than 4.

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