The New Year's pump market did not arrive as scheduled for two consecutive years. What does this mean for US stocks?

Analysts warned that this year's 'Christmas pump market' started weakly, combined with other factors, may mean a bigger drop in the stock market in January next year.

At the end of each year, investors are always looking forward to the arrival of the "Santa Claus rally", which includes the last five trading days of December and the first two trading days of the new year. According to Dow Jones Market Data, since 1950, the S&P 500 index has averaged a 1.3% pump during this period, and pump has occurred in nearly 80% of the time.

However, investors in 2024 may not see this market rally as expected for the second consecutive year. Dow Jones market data shows that as of Monday (December 30th) closing, the S&P 500 index has fallen by 1.1% since the beginning of the 'Christmas pump rally' on Christmas Eve.

This period of this year may be the worst performance of the S&P 500 since the end of 2015 and the beginning of 2016.

Historically, it is very rare for the S&P 500 index to experience consecutive declines during this period, which would be the first time since late 2014 to early 2015 and late 2015 to early 2016. According to Dow Jones market data, this situation has only occurred once since 1950 before these two periods.

This year's 'Christmas pump market' started weakly, coupled with other factors, prompting some analysts to warn that US stocks may continue to decline in January next year.

Not only the S&P 500 index shows signs of weakness, but the situation of the tech-dominated Nasdaq Composite Index is even worse. The Nasdaq may fail to welcome the 'Christmas pump' for the fourth consecutive year, making it the longest-lasting one in the history of the index.

Indeed, the S&P 500 index and the Nasdaq have seen considerable gains this year, with even the Dow Jones Industrial Average seeing a 13% increase.

However, there have been relatively few periods of market volatility this year, which makes people more worried that the recent wave of selling pressure may be a prelude to a larger volatility. Since early December, the performance of stocks with different market values and styles has been poor, except for a few dominant mega-cap stocks.

The stock market breadth has deteriorated sharply as a result. According to Dow Jones market data, earlier in December, the number of declining stocks in the S&P 500 index exceeded the number of pump stocks for 14 consecutive trading days, the longest period since at least the end of 1999.

However, a few large-cap tech stocks such as Broadcom (AVGO) and Tesla (TSLA) still have a strong pump, and they are also the main reason why the S&P 500 and Nasdaq have not experienced a larger decline. As of Monday's close, the Nasdaq even regained all the lost ground this month and accumulated a small pump.

But in the past few trading days, the trend of these stocks has also started to reverse.

Tom Essaye, Founder and President of Sevens Report Research, pointed out that the rebound of the S&P 500 index from the sharp drop in the Federal Reserve's interest rate meeting has clearly stalled, which is not a good sign for the stock market's near-term outlook.

Meanwhile, BTIG's technical strategist Jonathan Krinsky pointed out last week that the momentum trading that was driving the stock market higher in 2024 has recently shown signs of a reversal, which could spell trouble for the stock market in the coming weeks.

Klinsky said that as of last Friday (December 27th), only 58% of the stocks in the S&P 500 were above the 200-day moving average, the lowest level of the year. The situation where more than 60% of the constituent stocks have been above the 200-day moving average for 265 consecutive trading days (the longest since the end of 2021) has been broken.

At the same time, the pump trend of high beta momentum stocks—the most volatile stocks—has been broken. In addition, the Moving Average Convergence Divergence (MACD), a commonly used indicator, released a signal of the S&P 500 being sold off last weekend, the first time since September last year.

Taken individually, these indicators are not very important, but if they are viewed together, it may indicate that investors will continue to withdraw capital.

December will be the second month of decline for the S&P 500 index this year, following April. Apart from a brief panic in August that caused the VIX panic index to soar to a four-year high, the stock market has been very stable this year.

Klinsky said, 'This round of pump did not break through the previous support trend line, which is not a good sign. Although there are still four trading days left for the 'Christmas pump market', we are still worried that there will be a larger decline in the stock market in January next year. After experiencing Friday's sell-off, investors may also have such concerns.'

Kremlin said Monday that the continued weakness of the stock market on Monday confirmed his speculation last weekend, according to which some of the selling pressure may come from investors' expectations of profit-taking in January next year.

Many Wall Street strategists attribute the sluggish performance of the stock market in December to the rise in US bond yields. While the stock market fell last Friday, the 10-year US bond yield reached its highest level in over seven months.

However, the stock market continued to weaken on Monday despite the decline in yields. The S&P 500 index fell 1.1% on Monday to 5907 points, but it is still higher than earlier lows this month.

However, the fact that the S&P 500 index has not regained the 6000 point mark has kept technicians like Krinsky cautious. Krinsky pointed out that the previous support level seems to be turning into a resistance level.

If the situation does turn out as such, it may take some time for the S&P 500 to return to its historical highs after setting 57 closing records in 2024.

At the close on Monday, the Nasdaq and the Dow also saw a decline, although both narrowed their declines from intraday levels. The Nasdaq fell 1.2%, while the Dow dropped about 420 points to 42574, a 1% decline.