Concerns About Market Breadth as S&P 500 Shows Rare Warning Signals

The S&P 500 is currently displaying a rare technical warning signal not seen since the Jimmy Carter administration. For 14 straight days, the number of declining stocks has outweighed advancing ones, raising red flags for investors.

Market Conditions: Ed Clissold, chief U.S. strategist at NDR, emphasizes that market tops typically begin with breadth divergences. He highlights that this marks the longest streak of declines since October 15, 1978. This worrying trend in market breadth occurs while the S&P 500 trades just 4% below its all-time high, concealing deeper issues affecting the market. The equal-weighted version of the S&P 500, which offers a more accurate picture of typical stock performance, has already experienced a 7% drop from its peak.

Looking at historical patterns, there is cause for concern. After similar breadth declines were observed since 1972, the S&P 500 has delivered an average return of just 0.1% over the following six months, a stark contrast to the usual 4.5% gain seen in other periods.

As we approach the end of the year, traditionally a bullish time for the stock market, the situation becomes increasingly critical. Clissold warns that a lack of a Santa Claus Rally could be troubling. This seasonal rally usually occurs during the last five trading days of the year and the first two of the following year, often driven by positive factors like year-end portfolio adjustments and holiday sales optimism. A failure to experience this rally could deepen the existing breadth divergences.

Investor sentiment adds to the growing unease. According to NDR’s sentiment indicators, extreme optimism has persisted since September, marking the seventh-longest period of excessive bullishness since 1995. This high level of optimism, coupled with the Federal Reserve's recent hawkish approach toward potential interest rate cuts in 2025, has contributed to the market's slowest weekly performance since March 2023.

Clissold warns that if the stock market cannot address these breadth divergences in the upcoming weeks, it could suggest that concerns regarding a more challenging year in 2025 might become a reality.

Market Movements: Despite these warning signals, the S&P 500 rose over 1.5% on Friday, closing at 5,956.61. The Dow increased by 1.55%, while the NASDAQ climbed 1.65%. The SPDR S&P 500 ETF (SPY), which closely tracks the S&P 500, finished 1.20% higher, and the Invesco QQQ Trust (QQQ) rose by 0.87%.

It is essential to observe how these market dynamics evolve, especially as analysts wait to see if the expected end-of-year rally materializes.

S&P500, Market, Rally