Portfolio Rebalancing Flows Signal Volatility Ahead for Year-End Trading

It was another tough day for stocks, with the market down over 1%. The finished 1.07% lower, but the breadth numbers were particularly weak.

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Of the S&P 500, 470 stocks were down, 31 were up, and two were unchanged—an overwhelmingly bearish day.

On the New York Stock Exchange, there were 823 more decliners than advancers, which is better than Friday’s 1,700+ decliners but still negative. The McClellan Oscillator for the NYSE is at -43, down from -5 after rising briefly from -106. This indicates that breadth remains weak. The Summation Index has declined to -351, reinforcing the poor breadth metrics.

Considering these numbers, the S&P 500 might have been expected to drop more. The (RSP) has fallen nearly 7.5% from its November 27 peak, compared to just a 3% decline in the leading S&P 500.

The is down around 4% from its high, while the () has fallen nearly 10%.

Sector-specific indices highlight more profound losses. The (HGX) is down 18% from its peak and is trading near July levels, only a few percentage points above where it started in 2024.

The (XLB) has dropped 15% from its highs and is back to its start-of-year level. Without the strong performance of the “Magnificent Seven” stocks, overall S&P 500 losses would likely be much steeper.

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This market weakness seems tied to liquidity issues and rising rates, trends that have persisted since mid-October. Key sectors like XLB and HGX peaked around that time, forming double tops before declining.

Yesterday’s S&P 500 movement looked like a rebalancing event. The last two trading sessions saw significant selling pressure in futures between 7 and 8 AM, ahead of the market open, on decent volume. A similar decline occurred around 7 AM yesterday, but on lighter volume. If this pattern repeats today, it could confirm that these moves are related to rebalancing or similar flows.

The dropped 9–10 basis points yesterday, though the reason is unclear. With yields rising 70 basis points this year (from 3.83% on January 2 to 4.53%), yesterday’s drop could also reflect portfolio rebalancing as the year ends.

It’s also worth noting that most global markets are closed on December 31, while U.S. markets remain open all day, making them a key liquidity source heading into the year’s final trading day.

Yesterday, the S&P 500 found support around 5,875 and faced resistance at 5,935 levels throughout the afternoon. If support at 5,875 breaks, the next level to watch is 5785, which could lead to more significant moves as we start the new year.

A potential head-and-shoulders pattern is forming on the , but it needs a break below 58.75 before we can draw firmer conclusions. We’ll need to stay patient and see how things develop over the next day or two.

Wishing you a great evening and a Happy New Year! See you on January 2.

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Key Terms:

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1.McClellan Oscillator: A technical indicator that measures market breadth momentum by analyzing the difference between advancing and declining stocks. Negative readings, like -43, point to a weakening trend.

2. Summation Index: This is a cumulative version of the McClellan Oscillator used to track longer-term market breadth trends. A deeply negative value, like -351, highlights sustained weakness.

3. Double Top: A bearish chart pattern where an asset’s price peaks twice at similar levels before declining. It’s often a precursor to a downtrend.

4. RSP (S&P 500 Equal-Weight Index): An index that weights all 500 S&P stocks equally, contrasting with the market-cap-weighted S&P 500. It often reveals broader market health that mega-cap stocks can obscure.

5. HGX (Housing Index): A sector-specific index tracking housing-related stocks. Its 18% decline from peak levels indicates significant sector challenges.

6. XLB (Materials Sector ETF): Tracks materials companies, highlighting industry trends like chemicals, construction materials, and mining. It has given back most of its yearly gains.

7. Magnificent Seven: A recent term referring to the seven dominant mega-cap tech stocks (e.g., Apple (NASDAQ:), Microsoft (NASDAQ:)) that have disproportionately influenced the S&P 500’s performance.

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