This Hasn’t Happened to U.S. Stocks in More Than 20 Years – Here’s Why Investors Should Be Concerned

The U.S. stock market is under increased scrutiny as it struggles with a significant phenomenon known as “bad breadth.” Since the beginning of December, the breadth of the market—most commonly measured by comparing the number of stocks that are rising to those that are falling—has notably worsened, even while the S&P 500 index has managed to climb higher. This troubling trend has resulted in a situation that investors have not witnessed in over two decades.

Understanding Market Breadth

As of Thursday’s market close, the S&P 500 has faced nine consecutive trading sessions where the number of stocks declining has outnumbered those gaining. This data, analyzed by Jonathan Krinsky, a technical strategist at BTIG, has raised alarms in the investor community. The only other time in recent history that breadth has been this weak for such an extended period was in the aftermath of September 11, 2001.

Currently, leading tech stocks—including members of the so-called “Magnificent Seven”—have been propping up the overall market performance. Despite some of these stocks not reflecting broader market sentiment, they are effectively compensating for the weakness seen in other sectors. The S&P 500 has recorded a modest gain of 0.4% since the start of December, following its strongest monthly performance in over a year during November.

The Equal Weight Perspective

However, when examining the performance from an equal-weighted perspective, a different narrative unfolds. The Invesco S&P 500 Equal Weight ETF (RSP) has experienced a sharp decline of 2.5% in December and marked its own ninth consecutive day of losses. This reflects the longest losing streak since Christmas Eve in 2018, a time when the market was engulfed in a severe selloff that ultimately led to annual losses for the S&P 500.

Comparative Historical Context

The unusual breadth condition raises questions about market sustainability. Historical data indicates that such dismal breadth trends are often correlated with stocks trading significantly below prior record levels. Jason Goepfert, a senior research analyst at SentimenTrader, noted that there have only been fewer than 20 similar instances over the past 70 years. Typically, these episodes occur when the S&P 500 is around 12% lower than its recent high. As per Thursday’s close, however, the index was merely 0.6% away from its record of 6,090.27 reached recently, a juxtaposition that has never been seen before under such weak breadth conditions.

Momentum vs. Value Stocks

As December unfolds, many analysts, including Krinsky, had anticipated a correction in the powerful momentum trade that had fueled the market’s substantial post-election rally. This expectation materialized recently, impacting well-known momentum stocks such as Palantir Technologies Inc. (PLTR) and AppLovin Corp. (APP), both of which have seen little to no recovery following their declines. In parallel, value stocks have also taken a hit, with the S&P 500 Value Index (SPYV) also tumbling for its ninth straight day—marking its longest recorded losing streak since 2000.

Anticipating Market Volatility

These developments induce a sense of caution in the investor landscape. Krinsky expressed that the recent market fluctuations have left many investors in a state of “whiplash,” a feeling likely shared by others navigating these tumultuous waters. He predicts that this could be a precursor to heightened volatility early next year as investors begin to assess their gains.

Looking Ahead: Future Prospects for the S&P 500

Despite current struggles, the S&P 500 is projected to climb more than 25% in 2024, which—when factoring in dividends—would represent the first instances of consecutive total annual returns exceeding 25% since the late 1990s, according to FactSet data. This remarkable potential performance, however, remains shadowed by the concerning breadth situation presently at play. Investors are left to navigate these uncertain waters, weighing the implications of market breadth in context with the overall health of the stock market.

Conclusion

The current state of the U.S. stock market raises red flags for investors. The consistent decline in breadth over nine consecutive sessions creates an atmosphere of caution as analysts and market participants remain alert to potential shifts. As the year unfolds, all eyes will be on how these trends develop and what they mean for the sustainability of market growth moving forward.