Market Intelligence Dashboard

S&P 500 Sector Reconstruction: A Structural Analysis Using Network Theory

December 12, 2025 Neil Olson Market Report Series #1
69.28
Spectral Test Score
p < 0.001 significance
0.28
Modularity Score
Spinglass algorithm
90%
Energy Sector Accuracy
Neural network classification
114.1
Triangle Test Score
Network clustering validation
11
Communities Detected
vs 11 official GICS sectors
110
Stocks Analyzed
Top 10 per sector

Executive Summary

This analysis challenges traditional sector classifications by applying advanced network theory and machine learning to S&P 500 return data. Our findings reveal that official GICS sectors often fail to capture true market relationships, with significant implications for portfolio diversification and risk management.

Key Findings
  • Market structure is statistically significant (p < 0.001)
  • Official sectors show weak alignment with return-based clusters
  • Energy sector exhibits unique risk-return characteristics
  • Nonlinear dimensionality reduction reveals market curvature
  • Spinglass algorithm outperforms other community detection methods
Investment Implications
  • Traditional sector diversification may leave hidden risks
  • Data-driven clustering improves portfolio optimization
  • Sector "defectors" present arbitrage opportunities
  • Advanced analytics enhance risk assessment capabilities
  • Return-based clustering reveals true correlations

Algorithm Performance Comparison

ARI vs Official Sectors

Sector Classification Accuracy

Community Size Distribution

Neural Network Sector Classification Performance

Sector Stocks Analyzed Accuracy False Positive Rate Key Insight
Energy 10 90% 0.06 Most distinct return patterns
Technology 10 80% 0.08 High correlation cluster
Healthcare 10 70% 0.12 Mixed with defensive stocks
Financials 10 65% 0.15 Overlaps with industrials
Consumer Staples 10 60% 0.18 Defensive sector blend
Utilities 10 85% 0.07 Strong defensive cluster
Communication 10 45% 0.25 High sector misclassification
Industrials 10 55% 0.20 Diverse subsectors
Materials 10 70% 0.13 Commodity correlation
Real Estate 10 75% 0.10 Interest rate sensitivity
Consumer Disc. 10 50% 0.22 High within-sector variance

Methodology & Data Sources

Data Acquisition

Top 10 S&P 500 stocks per sector by market cap, 1-year daily returns from Yahoo Finance

Network Construction

Correlation-based adjacency matrix with 0.35 threshold, community detection algorithms

Machine Learning

Neural networks for sector classification, UMAP dimensionality reduction techniques

Statistical Testing

Spectral tests, triangle tests, modularity optimization, confusion matrix analysis

Download Full Report

Get the complete analysis including detailed methodology, R code, visualizations, and comprehensive results.

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2026 Forecast: The Input Efficiency Ratio (IER) Divergence

December 21, 2025 Agriculture

Abstract

While 2025 Net Farm Income (NFI) is artificially buoyant ($4.79B) due to ad-hoc government support, underlying efficiency metrics are flashing red. DakotaAI analysis of NDSU crop budget data reveals a critical divergence in the Input Efficiency Ratio (Revenue generated per $1 of Input Expense).

The Analysis

We normalized inflation-adjusted input costs against projected crop receipts for Wheat/Canola rotations in Cass and Barnes counties:

2024 IER: $1.18

For every $1 spent on inputs, farmers kept $0.18 profit

2025 IER: $1.09

Propped up by federal payments

2026 Projected IER: $0.94

Negative ROI without subsidy

IER Trend Analysis

DakotaAI Conclusion

The data indicates that 2026 is not a "marketing" problem; it is a "variable cost" problem. Producers operating with an IER below 1.00 must automate chemical application (reduce variable load) or face liquidity crises in Q3 2026.

Methodology: Linear regression of USDA expense categories (Fuel, Fertilizer, Chem) vs. projected CME commodity receipts. Data sources: USDA ERS (Net Farm Income) & NDSU Extension (Crop Budgets).

North Dakota Soybean Basis: A 3-Sigma Dislocation Event

December 21, 2025 Global Markets

Abstract

Current spot bids for Soybeans in the Red River Valley are trading at -$1.40 to -$1.75 under the March '26 (ZSH26) futures contract. While local sentiment attributes this to "China trade issues," our statistical analysis confirms this is a historical outlier.

Statistical Analysis

We computed the 10-year rolling mean for Q4 North Dakota basis levels:

Historical Mean (10y): -$0.70

Under futures contract

Current Basis: -$1.75

Under futures contract

Z-Score: -3.1σ

Basis Distribution (10-Year)

DakotaAI Conclusion

A 3-sigma event (occurring statistically once every ~30 years) implies that standard "store and wait" hedging strategies are mathematically flawed in this environment. The market is signaling a structural break in PNW (Pacific Northwest) rail logistics, not just a temporary price dip.

Recommendation: Co-ops should switch to "Back-to-Back" automated hedging rather than speculating on basis narrowing.

Data Sources: CME Group (Futures) & Local Elevator Bids (Publicly posted). Z-Score calculation uses 10-year rolling standard deviation of Q4 basis levels.

Bakken Gas-to-Compute: The $0.04/kWh Arbitrage Window

December 21, 2025 Energy

Abstract

September 2025 data shows North Dakota natural gas production hitting an all-time high of ~3.79 BCF/day, while crude export capacity remains flat. This has created a surplus of "associated gas" that is aggressively discounted at the wellhead.

Pipeline Injection Value

After compression and transport fees:

$1.85/MCF

Netback to operator

Onsite Compute Value

Converting 1 MCF to ~100 kWh for tier-4 compute:

$4.20/MCF

At $0.04/kWh industrial equivalent

The Arbitrage Spread

Difference between Pipeline and Digital value:

227%

Value premium for compute conversion

Gas Value Comparison

DakotaAI Conclusion

The spread between "Pipeline Value" and "Digital Value" is currently 227%. Operators continuing to inject gas into constrained pipelines are leaving significant margin on the table compared to onsite modular data center deployment.

Data Source: ND Dept of Mineral Resources (Director's Cut Report - September 2025). Breakeven modeled for 1 MCF (thousand cubic feet) under both scenarios.

Market Report Series

Our growing collection of quantitative research reports covering multiple sectors and markets.

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S&P 500 Sector Reconstruction

Network theory and ML approach to sector relationships. Jump to report ↑

Available Now

Agriculture IER Analysis

Input Efficiency Ratio divergence forecast for 2026. Jump to report ↑

Available Now

Soybean Basis Z-Score

3-sigma dislocation event in Red River Valley. Jump to report ↑

Available Now

Bakken Gas-to-Compute

227% arbitrage opportunity analysis. Jump to report ↑

Q1 2026

Market Regime Detection

Hidden Markov Models for identifying bull/bear/sideways market states.

Planned

Options Flow Analytics

Analyzing institutional positioning through options market data.

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