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.

Start with the ratio of the Invesco S&P 500 Equal Weight ETFRSP  to the traditional market-cap-weighted index, SPDR S&P 500 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.

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 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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