The US stock market is experiencing a concerning trend of “bad breadth,” a phenomenon where declining stocks outnumber advancing stocks, even as major indices like the S&P 500 continue to rise. This divergence has persisted for nine consecutive sessions, a level of weakness not seen since the period surrounding September 11, 2001, according to Jonathan Krinsky, a technical strategist at BTIG.
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Mega-Cap Stocks Mask Underlying Weakness
While the S&P 500 has managed a modest 0.4% gain since December began, fueled largely by the performance of mega-cap technology companies like the “Magnificent Seven,” this narrow market leadership is masking underlying weakness in broader market participation. The strength of these few companies is compensating for declines in a significant portion of the market. This concentration of gains in a small number of stocks raises concerns about market sustainability and potential vulnerability to a correction.
The Invesco S&P 500 Equal Weight ETF (RSP), which assigns equal weight to each stock in the index, provides a clearer picture of this underlying weakness. The RSP has fallen 2.5% in December and closed below its opening price for nine straight days, the longest such streak since Christmas Eve 2018. This period preceded a significant market selloff that resulted in a negative annual return for the S&P 500. Krinsky notes the concerning parallel between the current market environment and the conditions observed in late 2018.
Historical Precedent Signals Potential for Volatility
Historically, such prolonged periods of negative breadth have coincided with market levels significantly below record highs. According to Jason Goepfert, senior research analyst at SentimenTrader, similar instances over the past 70 years have typically occurred when the S&P 500 was 12% below its record high. Currently, the index sits just 0.6% below its recent peak, representing an unprecedented level of proximity to record highs while experiencing such weak breadth.
While a postelection rally initially boosted market breadth, December has witnessed a sharp reversal, with both momentum and value stocks experiencing significant declines. The S&P 500 Value Index (SPYV) has also recorded its longest losing streak on record, falling for nine consecutive days. This widespread weakness across different investment styles further underscores the concerning nature of the current market environment.
Anticipating Increased Volatility in 2025
Krinsky anticipates that the current market dynamics could foreshadow a period of heightened volatility in early 2025 as investors look to secure profits after a strong year. The S&P 500 is currently on track for a gain exceeding 25% in 2024, a level of performance not seen in consecutive years since the late 1990s. This potential for profit-taking, coupled with the underlying weakness indicated by negative breadth, suggests a cautious outlook for the near term.
The market closed lower on Thursday, with the S&P 500 down 0.5%, the Nasdaq Composite down 0.7%, and the Dow Jones Industrial Average down 0.5%. These declines, while moderate, reinforce the prevailing trend of market weakness and underscore the concerns raised by the persistent negative breadth.
