Happy New Year!
As we enter the 2025 trading year, it’s worth looking back at how 2024 ended with a whimper. As you can see, the last few trading days of the year for the S&P 500* didn’t bring a typical end-of-year rally:
Despite a lackluster ending, stocks still ended 2024 up around 24%. That makes two consecutive years of annual gains north of 20%.
Still, given last week’s performance, is there something more serious taking place underneath the surface?
Let’s first turn to historical data.
We wanted to find similar situations – specifically when the S&P 500 turned in three or four consecutive losing days in the final trading week of the year. Since 1928, when there were three consecutive declining sessions in the final trading week, the next month’s average return was 3.6% with a win ratio of 80%:
A year later, the average gain is 12.4%, again with a win ratio of 80%. And in the few cases with four consecutive losing days in the year’s final trading week, forward returns are even better.
At its most simplistic level, we believe 2024’s year-end action can be primarily attributed to profit-taking, end-of-year tax loss harvesting, and end-of-year rebalancing. Keep in mind, markets have been strong for two years now.
So, is the recent weakness a turning point? We don’t think so.
While some pundits point to elevated short-term interest rates, we’d argue rates are hardly pushing levels that would undermine markets. Keep in mind, the Federal Reserve doesn't want financial conditions to tighten because it would offset the central bank’s current easing process (this is the “Fed put” we’ve discussed multiple times).
This thesis is supported by the strong fundamental picture heading into 2025. Still, it would behoove us to dig a little bit deeper to ensure the data supports our stance.
What Moves Markets
Let’s start with “big money” professional investor trading data since it’s what moves markets.
Remember that every year around this time, Wall Street is staffed with skeleton crews of junior people and the unlucky senior staffer who couldn’t get time off. Thus, it’s well known that stocks’ final weeks of a year are often noisy, volatile, and most importantly, low volume. And again, most of the trading is profit taking, tax loss harvesting, and fund rebalancing (this is why CFS conducts rebalancing after the holidays on the first trading day of the new year, after things settle a bit).
We can see this play out in the buy/sell data for stocks:
And exchange-traded funds:
Markets predictably entered a vacuum of signals where everything dried up. Signals for stocks and ETFs were extraordinarily low to end 2024.
This is even more pronounced when looking at the entire universe of unusually large trades. The falloff in activity is massive:
To help put this into perspective, let’s compare 2024’s ending buy/sell data to running one-year averages for both:
That small circle above is last week. Visually, it’s inconsequential relative to the rest of the year.
The latest reading on one-year buy/sell averages is 78.8 buys and 46.3 sells per day. On Dec. 24, there were four buys and no sells.
Here is what 2024’s last week looked like in terms of activity by market capitalization level:
The entire week produced 47 buy signals and 65 sell signals. Going back to 2024’s daily averages (78.8 buys and 48.3 sells), the year’s last week was roughly equivalent to an average day, in terms of total signals.
In other words, it took a week to get to the one-day average.
To ensure this comparative average exercise is historically accurate, our friends at MAPSignals took this one step further and summarized average “big money” trading activity since 1990. Daily average buy and sell signals have increased with time, as has the total “big money” trading activity average (BMTA). It’s clear the activity in the last week of December was well below average:
So, what does this mean? It means big market moves on thin volume are artificial. It’s not real action, but merely mice playing.
As long-term investors, we typically don’t worry much about a single day’s performance. Shouldn’t the same hold true for low-volume, day-in-a-week trading periods like we just experienced?
We think so.
So rather than worry about an almost certain head fake, we’re focused on the opportunities ahead. We analyzed what sectors the real money moved in and out of in 2024, which is the type of data that we start with to find the strongest sectors and identify their leading stocks:
This was a crucial step before our first scheduled rebalance of 2025 (which we executed on Jan. 2).
We think investors should also recenter and refocus on the opportunities heading into 2025. And when you do, make sure to use reliable data, not short-term, illiquid market data that invokes volatility and worry.
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*Past performance does not guarantee future results.
*Investing involves risk and you may incur a profit or loss regardless of strategy selected.
* The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
Securities sold through CoreCap Investments, LLC. Advisory services offered by CoreCap Advisors, LLC. Cornerstone Financial and CoreCap are separate and unaffiliated entities.