The market feels like it’s on a never-ending race higher but there’s a bearish undertow building in the market as we head into the end of the year.
Year-to-date, the S&P 500 is trading more than 26% higher. That’s a banner year by any measure as the average gains for the broad index is 10.47% over the last 20 years.
As strong as the market rally feels, there’s been a slow shift in the current that may cause a riptide for stocks in early 2025.
As of mid-December, 125 of the S&P 500 stocks are trading in long-term bear market trends. Just a month ago that number was 91 and two months ago, 85.
The steady increase in stocks shifting into long-term bear market trends has implications for the broader market as we head into 2025. The negative momentum that is building is likely to create a headwind for stocks that will make the market vulnerable to a longer, deeper correction for the first time in more than two years.
There are a few ways to determine whether a stock is trading in a bear market.
One method is to declare that a stock has moved into a bear market after it declines more than 20% from its highs. In many cases though, this method is flawed as there are a number of stocks that experience enough volatility to dip below the 20% threshold.
Another “technical” method for determining if a stock is in a bear market is to use its simple 20-month moving average.
The 20-month moving average is a long-term trendline that is calculated by simply averaging the closing prices from the last 20 months, including the current close. That forms a smooth trendline that accounts for volatility.
Breaking below that long-term trendline qualifies a stock – or index – to be labeled in a bear market.
The chart below shows the S&P 500 in its various bull and bear market phases using the 20-month moving average as the determining factor.
As of mid-December, there are 125 companies that qualify as trading in a bear market.
Most investors would think that these are obscure companies, ones that they would never have in their portfolios. Wrong!
Among the 126 stocks in a bear market are widely held names like Adobe (ADBE), Nike (NKE), Johnson & Johnson (JNJ), United Parcel Service (UPS) and semiconductor company Applied Materials (AMAT).
Refining the list even further, 103 of these stocks are trading in both a short- and long-term bear market trend.
This suggests that thee stocks have strong negative momentum trading against them, likely to cause them to continue their losses for the next 3-6 months.
I’ll get into a few of those names and the implications for one key sector in a minute.
We’re heading into what is normally a seasonally weak period for trading.
Over the last 20 years, the S&P 500 runs into a “soft patch” for returns during the months of January and February.
January posts positive returns 50% of the time – a coin toss on whether the market moves higher or not – with average gains of just 0.6%. February is similar, with average losses for the month of 0.1% over the same 20 years.
Investors are already feeling a bit nervous about whether stocks are forming a short-term “bubble”, the January seasonality could act as a trigger for investors to start selling.
Add to that the growing number of stocks that are transitioning into a bear market and we’ve got a situation in which the “foundation” of the long-term bull market is degrading.
While the market is not likely to fall into a bear market itself over the next 3-6 months, investors need to be aware of the number of stocks that are trading in bear market trends as a further increase towards 50% of the S&P 500 stocks in a bear market will increase the long-term risks.
Of the 125 S&P 500 stocks in a long-term bear market trend, 102 of them are what can be referred to as being in a Double Bear Market Trend.
This means that the stock is trading below its 20-month moving average while its shorter, intermediate-term 50-day moving average is trending lower.
The significance of the bearish 50-day trend is much simpler than most investors might think.
The 50-day moving average is historically the best technical representation of one of the most popular saying for investors, “the trend is your friend”.
Quantitative tests have shown that the average S&P 500 stock has a 67% chance of closing higher on any day that its 50-day moving average is trending higher.
The inverse of that is true as well as a stock historically has a 67% chance of closing lower any day that its 50-day moving average is trending lower.
The combination of an intermediate-term and long-term bear market trend for a stock historically forecasts continued declines for a period of 3-6 months.
Here’s the list of stocks currently trading under that Double Bear Market Trend conditions.
Intel (INTC), Advanced Micro Devices, Inc. (AMD) and Applied Materials, Inc. (AMAT) are among the 10 semiconductor companies that are trading in a Double Bear Market Trend.
The leadership of semiconductor stocks through 2024 has been one of the major underpinning of the bull market’s strength. This is also one of the sector where investors are starting to question high valuations.
The semiconductor sector has been trading in a tightening range since its peak in July, with just a few of the leaders of the group providing most of the strength. Companies like NVIDIA (NVDA) and Taiwan Semiconductor (TSM) have been carrying the weight of the sector on their shoulders.
This week, both companies struggled to stay above their 50-day moving average. Remembering that “the trend is your friend”, a shift in these stocks’ prices below their 50-day moving averages will add to the market’s selling pressure moving into January.
