The S&P 500 Equal Weight Index ([SPXEWI]) gave a sell signal last week for the first time since bottoming in April.

A common phrase investors have likely heard over the last few years is, “breadth is bad, it might be bearish for equities,” only for the cap-weighted S&P 500 to continue to march higher. Well, get ready to hear it again. Breadth is coming out of the market as we mentioned in one of yesterday’s articles, “Bullish Percent Moves Lower.”  However, other than a reversal into Os on the S&P 500’s (SPX) default chart, the technical picture still looks quite strong. Looking at a different benchmark, the S&P 500 Equal Weight Index (SPXEWI) has shown signs of weakness over the last few weeks. After being unable to break through its prior high at 7600, SPXEWI reversed down into Os and then gave its first sell signal since April at 7300. SPXEWI did reverse back into a column of Xs this week but this does set up the potential for a second consecutive sell signal at 7250. While there is nothing to be extremely alarmed about yet, it’s clear that the average stock in the S&P 500 has had some wind taken out of its sails after a strong run since the April low.

One of our short-term indicators, the Ten Week for the S&P 500 (^TWSPX), is giving the same signal as the price action on SPXEWI that the average stock in the S&P 500 is starting to slow down. After bouncing around 60% to 80% from most of May until the end of July, TWSPX is now charting at 50%, which shows that only half of all stocks within the S&P 500 are trading above their respective ten-week (50-day) moving average. This action itself is not a major concern yet, but in conjunction with the weakening price action on SPXEWI it’s giving investors a yellow light over the next few weeks at least. Any stocks that have already shown signs of breaking down to weak attribute status or that are trading in heavily overbought territory following a strong multi-month performance should be investigated as trimming opportunities at this point. While we haven’t seen evidence that the long-term trend is changing for large cap domestic equities, now is not the time to be overly aggressive with the short-term picture looking less than ideal. For those that implement covered call strategies, this would be a good time to write calls on existing positions.