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The stock market has had a tough week, but it might also be in store for a tough year in 2025.
The market is on track for its worst week since March 2023 after the Federal Reserve gave a hawkish forecast for interest rate cuts in 2025. But looking at the market's internals, it's clear that damage had been inflicted well before the Fed's Wednesday meeting—and the signal is a historic indicator of tough times ahead.
The number of stocks in S&P 500 that are declining outpaced advancing stocks for 14 consecutive days on Thursday.
The advancing/declining data helps measure underlying participation in market moves, and the recent weakness signals that even though the S&P 500 is only off 4% from its record high, there's damage under the hood of the benchmark index.
This is evidenced by the equal-weighted S&P 500 index being off 7% from its record high.
According to Ed Clissold, chief US strategist at NDR, the 14-day losing streak for the S&P 500's advance-decline line is the worst since October 15, 1978.
Clissold said 10-day losing streaks or more in advancing stocks relative to declining stocks can be a bad omen for future stock market returns.
While this scenario has only been triggered six times since 1972, it shows lackluster forward returns for the S&P 500. The index has printed an average six-month forward return of 0.1% after these 10-day breadth losing streaks flashed, compared to the typical 4.5% average gain seen during all periods.
"Studies with six cases hardly make for a strategy. But market tops have to start somewhere, and many begin with breadth divergences, or popular averages posting gains with few stocks participating," Clissold said.
Perhaps more telling for the stock market is whether it can stage a recovery as it heads into one of the most bullish seasonal periods of the year: the Santa Claus trading window.
If it can't, that would be telling, according to Clissold.
"A lack of a Santa Claus Rally would be concerning not only from a seasonal perspective, but it would allow breadth divergences to deepen," the strategist said.
Also concerning to Clissold is investor sentiment, which has flashed signs of extreme optimism since September. According to the research firm's internal crowd sentiment poll, it is in the seventh-longest stretch in the excessive optimism zone, based on data since 1995.
"Several surveys have reached what could be unsustainable levels," Clissold said, warning that any reversal in sentiment could be a warning sign for future market returns.
Ultimately, continued stock market weakness, especially in the internals, would suggest to Clissold that 2025 won't be as easy as 2024 for investors.
"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," the strategist said.
