It is hard to make quantifiable observations without having a strong anchor point. Beneath the surface of a fresh market all-time high, the foundation is looking increasingly shaky. Market breadth, a measure of stocks participating in a rally, has slipped below the level it had in 2008 – a year that holds a special place in all economic textbooks.
Equal-Weight At Lows
Start with the ratio of the Invesco S&P 500 Equal Weight ETF(NYSE:RSP) to the traditional market-cap-weighted index, SPDR S&P 500 (NYSE:SPY). It just dropped to 0.292, its lowest point since November 2008. To put that in a recent context, at the 2022 bear market low, the ratio stood about 15% higher.
Equal-Weight / Market Cap S&P 500 Ratio, Source: TradingView
That kind of imbalance isn't just unusual — it's historically dangerous. Every time market leadership has concentrated to this extreme, it's been a prelude to pain. It has happened in the Dot-com bubble and the Great Recession.
Another statistic should make an investor pause. Only 59% of S&P 500 companies are trading above their 200-day moving average.
S&P Stocks Above the 200-Day Moving Average, Source: TradingView
This moving average is a general measure of an intermediate trend. Being below 60% means more than 200 stocks in the index are trending downward, even as the benchmark sits at record highs.
Protecting Against Poor Breadth
This isn't the first time investors have faced an ultra-narrow market, and history doesn't paint a pretty picture. Goldman Sachs crunched the numbers and found that when market concentration reaches extremes like this, the next decade's returns tend to disappoint. High-flying rallies turn into long stretches of mediocrity, or worse.
Protecting investments means turning to diversification – shifting some allocation into equal-weight ETFs, like the Xtrackers S&P 500 Equal Weight (OTC:CPTFF) or tilting toward value and small caps, which gives exposure outside the mega-cap bubble.
Historically, these plays perform best when concentration finally cracks and leadership rotates. Dynamic strategies, hedges, or simply reducing reliance on passive mega-cap exposure are other options.
However, investors should be careful with blindly piling into small-caps. While mega-cap companies have suffered from "winner's curse," small-caps have become increasingly unprofitable. Around 43% of the Russell 2000 index is earning in the negative territory, compared to around 6% in the S&P, significantly raising the risks of "diworsefication."
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