It is the last full week of trading for the markets in 2025. So far, the month of December has been lopsided. This brief market commentary will run through some stats and provide context to the market’s recent fluctuations.
In December, strength has been skewed
Through Friday, December 13th, the S&P 500 remained essentially flat for the month, while the Nasdaq surged more than 4%. In contrast, the S&P 500 equal weight index declined nearly 3%.
What is Leading the Market?
The Nasdaq’s December strength is being led by the Magnificent Seven stocks (Apple, Microsoft, Nvidia, Tesla, Amazon, Google, and Meta). These companies now represent over 30% of the S&P 500's total market capitalization.
Market Breadth
Market breadth is beginning to weaken. Since the start of December, declining stocks have outnumbered advancing ones in the S&P 500, even as the index shows slight gains. According to a post by Optuma, “S&P 500 net Advance-Declines has been negative for 9 straight days for the first time since 2001. The index hasn’t had a 5% pullback since August.” (Source)
Most Active Stocks
Trading activity in 2024 has been heavily concentrated in technology stocks. Nvidia leads as the most actively traded S&P 500 stock, with nearly double the trading volume of Tesla (second most active) and quadruple that of Apple (third most active).
Market Sentiment is Weakening
Market sentiment traditionally serves as a contrarian indicator – excessive optimism often precedes market downturns, while widespread pessimism frequently signals potential rallies.
The Investor Sentiment Survey, conducted weekly since 1987, reveals 2024 as having the fourth-highest average bullish sentiment on record. At 44%, this year's bullish sentiment significantly exceeds the historical average of 37.5%. Only 2000, 2003, and 2004 recorded higher average weekly bullish readings.
Further highlighting this unusual optimism, Optuma notes that “[2024] has only had 2 weeks this year with more Bears than Bulls- the lowest since 1999 which only had 1.” (Source)
While making no predictions, it's worth noting that the market dynamics and investor emotions currently mirror those seen in late 1999 and early 2000 – a period that preceded a significant bear market.
A Cause for Concern?
While markets have been healthy in 2024, these last two months have created some concerns.
Concern 1- Technology stocks are masking market weakness
The December broad market decline following November's rally is a normal fluctuation, but the exceptional performance of large technology stocks is noteworthy. With the Magnificent Seven comprising over 30% of the S&P 500, and the Information Technology sector more than double the size of the next largest sector, this concentration creates vulnerability. Tesla's 90% surge over two months exemplifies the potentially irrational exuberance in tech stocks. As buying momentum in these names eventually exhausts, their outsized market weight could trigger broader market instability.
Concern 2- Sentiment has been Bullish, but becoming more erratic
While 2024 has had predominantly bullish sentiment, recent patterns show increasing sentiment volatility. Bullish sentiment dropped to 37% in late November, but then had a sharp rebound to 48% two weeks later. This suggests growing investor emotionality. Erratic swings in sentiment are more common when markets become volatile.
Concern 3- International stocks have already broken down, as have bonds
Despite recent U.S. market strength, both the EAFE (Europe, Australia, Far East) and Emerging Market indexes have entered downtrends. Notably, bonds are also trending downward, suggesting that interest rate cut expectations may be overly optimistic.
Bottom Line
Markets are always in flux, and there will usually be both positives and negatives. Currently, the most pressing concern is the disconnect between extended large technology stocks and the broader market pullback. Any significant wavering in these tech leaders could trigger market volatility.
In response to these conditions, our Adaptive Portfolio has begun to make some adjustments, such as upgrading a few stock positions. While maintaining technology exposure, we remain broadly diversified with risk management positions, including inverse international holdings – particularly relevant given the current downtrend in international indexes.
As this will be our final commentary before the holidays, we wish all our readers a Merry Christmas and a joyful holiday season.