Why is it very difficult to determine the timing of an event? Analyzing and finding a long-term trend📈 is actually not so difficult, but when exactly the scenario will begin to be implemented is a much more difficult matter (if at all possible). 💡The figure shows a graph of the S&P500 index, superimposed on it is the ratio of the S&P500 index (SPX) to the Russell 2000 index of small and medium-sized companies (RUT). This ratio shows the concentration of weight in a small group of highly capitalized companies⚖️. At the moment, the concentration on technology companies is already high, but as history shows, there is more 🎯.
If we compare the current situation, and put the dotcom bubble on the graph, then from the current levels the index grew 🔺 by another 31% within 600 days. Why such a skew can exist for years? I see two main reasons:
1️⃣ Stimulating the market - when the government stimulates the market, it leads to a constant flow of capital into the market, which constantly increases the skew
2️⃣ Inflating the bubble - belief in endless growth, easy money, etc. causes greed and inflow of capital. And it is almost impossible to determine when the stimulus or inflation will end, so it is almost impossible to determine exactly when the indices may turn around📉.
P.S. The question may arise, why does the S&P 500 manipulate the weight of companies and allow such a skew? Everything is quite simple, the index must show high growth in order to use it. This is just a business, if the index does not show high growth, then this product will not be used.
