The S&P 500 is flashing a rare technical warning signal that hasn’t been seen since the Jimmy Carter administration, with declining stocks dominating market action for 14 consecutive days through Thursday.
What Happened: “Market tops have to start somewhere, and many begin with breadth divergences,” warns Ed Clissold, chief U.S. strategist at NDR, noting this marks the longest decline streak since Oct. 15, 1978, Business Insider reported on Monday.
The troubling market breadth comes as the benchmark index trades just 4% below its record high, masking deeper problems beneath the surface. The equal-weighted S&P 500, which better reflects the typical stock’s performance, has already fallen 7% from its peak.
Historical data paints a concerning picture for investors. After similar breadth declines since 1972, the S&P 500 has averaged just 0.1% returns over the following six months – significantly below the typical 4.5% gain seen during all periods.
The market faces a critical test heading into the traditionally bullish year-end period. “A lack of a Santa Claus Rally would be concerning not only from a seasonal perspective, but it would allow breadth divergences to deepen,” Clissold cautioned.
Adding to the worries, NDR’s sentiment indicators show investors have maintained extreme optimism since September, marking the seventh-longest stretch of excessive bullishness since 1995. This optimism, combined with the Federal Reserve’s recent hawkish stance on 2025 interest rate cuts, has pushed the market toward its worst weekly performance since March 2023.
“If the stock market cannot rectify recent breadth divergences in the next few weeks, it would suggest our concerns about a more difficult 2025 could come to fruition,” Clissold concluded.
Why It Matters: The term “Santa Claus rally” was coined by Yale Hirsch in 1972 in the “Stock Trader’s Almanac.” It refers to the tendency for stock prices to rise during the final five trading days of the year and the first two trading days of the following year. This period often sees higher prices due to factors such as year-end portfolio rebalancing, positive holiday sales reports, and optimism for the year ahead, all of which can contribute to strong returns for major stock market indexes.
When Benzinga asked if readers expect a Santa Clause rally, 57% responded that they expect one.
The S&P 500 warning comes even as the index surged over 1.5% to 5,956.61 on Friday.
The conflicting signals come as the benchmark index approaches what could be its best election year performance ever, having already notched 56 new all-time highs in 2024, according to Carson Research’s chief market strategist Ryan Detrick.
Price Action: Meanwhile, on Friday, the Dow traded up 1.55% to 43,000.53 while the NASDAQ rose 1.65% to 19,693.06. The S&P 500 also rose, gaining, 1.53% to 5,956.61. SPDR S&P 500 ETF Trust SPY which closely monitors the S&P 500 closed 1.20% higher and Invesco QQQ Trust QQQ closed 0.87% higher, as per Benzinga Pro.
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Disclaimer: This content was partially produced with the help of Benzinga Neuro and was reviewed and published by Benzinga editors.
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