The Stock Market Is Flashing a Warning Sign We Haven't Seen Since 2000. History Says Investors Should Do This Now.
Key Points
The current market breadth within the S&P 500, while it's near all-time highs, is historically unusual.
This signal last flashed during the peak of the tech bubble.
Instead of selling, here's another solution to mitigate your risk exposure.
The S&P 500 (SNPINDEX: ^GSPC) has spent most of 2026 at or near record highs. While that's been good news for anyone invested in the index, a problem is developing beneath the surface.
As of Oct. 5, the S&P 500 was trading at less than 1% below its all-time high, yet only 42% of its components were trading above their 200-day moving average. According to Dow Jones Market Data, the last time the S&P 500 was within 1% of a record high while more than half of its stocks traded below their 200-day moving averages was March 2000.
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Clearly, no one likes to see comparisons to the peak of the tech bubble. But this isn't a signal to sell stocks. Rather, it's time to rethink what you're actually owning when you buy the S&P 500.
Image source: Getty Images.
What's happening within the S&P 500 right now
Obviously, the S&P 500 is historically top-heavy right now. Tech stocks account for roughly 38% of the index, while the top 10 holdings also account for approximately 38%.
For most of the past few years, that hasn't mattered to investors because those mega-cap names have been among the market's best performers. However, it shows that what's happening right now isn't a broad market advance, and that usually means trouble for bull market sustainability.
As it stands, tech and energy are the only two sectors outperforming the S&P 500 year to date. The other nine S&P 500 sectors are all lagging the index. Financials, utilities, communication services, and consumer discretionary are all negative for the year.
When just a handful of stocks are pulling a 500-stock index higher, it becomes highly vulnerable to a pullback if tech momentum begins to cool. This might not be a bad time to rethink the index and equal-weight it instead.
Why the equal-weight S&P 500 makes sense
The Invesco S&P 500 Equal Weight ETF (NYSEMKT: RSP) owns all of the index's stocks, but only in 0.2% weights at the time of rebalance.
Tech still accounts for around 16% of the portfolio, but it's one of five sectors allocated at least 9%. It's a much broader way to invest in the index and reduces the downside risk exposure of being overweight in just a few tech stocks.
Plus, there's an inherent "buy low, sell high" mechanism built into it because it rebalances quarterly. The Invesco S&P 500 Equal Weight ETF can help reduce concentration and downside risks, while positioning investors for a long-term broadening of the bull market.
For long-term investors, selling the S&P 500 in a narrowing market isn't the answer. Rebuilding your exposure to it might be the better solution.
David Dierking has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.