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Index patterns

To track excesses and periods of high concentration on equity indices, it’s interesting to look at the difference between the market cap weighted index and the equal weight index. In the table below, you can see the total return differential between the S&P500 and its equally weighted version for the last 50 years. During times of market cap index outperformance, you can see that the difference is relatively small. Meanwhile, when the equal weight index outperforms, the difference tends to be slightly higher. Also, outperformance patterns tend to alternate, particularly after big differentials. Which brings us to today, a period of high concentration and high outperformance for the Cap weighted index, similar to the late 90’s period. It needed 7 years, from 2000 to 2006 to clean the market breadth. Notice that for the year 2000, after the bubble, the difference between both was the second largest, only surpassed by 2009, right after the GFC. Will 2025 be the year of reversal?

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