The New Year's rally has not come as expected for two consecutive years. What does it mean for the US stock market?

Analysts warn that a weak start to this year's "Santa Claus rally" and other factors could mean a bigger drop in stocks in January.

At the end of each year, investors look forward to the "Santa Claus rally," a period that includes the last five trading days of December and the first two trading days of the new year. Since 1950, the S&P 500 has risen an average of 1.3% during this period, and has risen nearly 80% of the time, according to Dow Jones Market Data.

However, in 2024, investors may not see this rally for the second consecutive year. As of Monday's close, the S&P 500 was down 1.1% since Christmas Eve, when the "Santa Claus rally" began, according to Dow Jones Market Data.

This period this year could go down as the worst for the S&P 500 since late 2015 and early 2016.

Historically, it is very rare for the S&P 500 to fall in this period for two consecutive years. This would be the first time since late 2014 to early 2015 and late 2015 to early 2016. Before these two periods, this had only happened once since 1950, according to Dow Jones Market Data.

The weak start to this year's "Christmas rally" and other factors have prompted some analysts to warn that U.S. stocks may continue to fall in January next year.

It’s not just the S&P 500 that’s showing signs of weakness. The tech-heavy Nasdaq Composite Index is in even worse shape. The Nasdaq is on track to miss its fourth straight “Christmas rally,” which would be the index’s longest run on record.

Admittedly, gains for the S&P 500 and Nasdaq are still respectable this year, with even the Dow Jones Industrial Average up 13%.

But the relative scarcity of volatile periods in the stock market this year has heightened concerns that the latest wave of selling pressure could be a prelude to a bigger turmoil. Stocks of all market caps and styles have performed poorly since early December, with the exception of a few dominant mega-cap stocks.

As a result, the breadth of the stock market has deteriorated sharply. Earlier in December, the number of stocks falling in the S&P 500 outnumbered those rising for 14 consecutive trading days, the longest such streak since at least the end of 1999, according to Dow Jones Market Data.

However, the gains of a few large-cap technology stocks such as Broadcom (AVGO) and Tesla (TSLA) have remained very strong, and they are also the main reason why the S&P 500 and Nasdaq have not seen more significant declines. As of Monday's close, the Nasdaq even recovered all its losses this month and accumulated a small increase.

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

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

Meanwhile, BTIG technical strategist Jonathan Krinsky noted last week that the momentum trade that has driven stocks higher into 2024 has recently shown signs of reversing, which could spell trouble for stocks in the coming weeks.

As of Friday, just 58% of the S&P 500 was above its 200-day moving average, the lowest level of the year, Krinsky said, breaking a streak of more than 60% of the components above the 200-day moving average for 265 consecutive trading days, the longest streak since the end of 2021.

Meanwhile, the uptrend of high-beta momentum stocks - the most volatile ones - has been broken, and the commonly used indicator, the Moving Average Convergence Divergence (MACD), signaled a sell-off in the S&P 500 last weekend for the first time since September.

Individually, none of these indicators is significant, but when taken together, they could indicate that investors will continue to pull out.

December will be the second down month for the S&P 500 this year, following April, and the stock market has been remarkably stable this year, except for a brief panic in August that sent the VIX fear index soaring to a four-year high.

"This rally failed to break through the previous support trend line, which is not a good sign," Klinsky said. "Although there are still four trading days left in the 'Christmas rally', we are still concerned about a bigger drop in the stock market in January next year, and investors may also have such concerns after the sell-off on Friday."

Klinsky said on Monday that the continued weakness in the stock market on Monday confirmed the point he made last weekend. According to his speculation, some of the selling pressure may come from the expectation that investors will take profits in January next year.

Many Wall Street strategists blame the stock market’s sluggish performance in December on rising Treasury yields. The 10-year Treasury yield hit its highest level in more than seven months as stocks fell on Friday.

But stocks continued to weaken on Monday amid falling yields. The S&P 500 closed down 1.1% at 5,907 on Monday, but it is still above its lows earlier this month.

However, the fact that the S&P 500 has not yet reclaimed 6,000 points has technical strategists such as Klinsky on the alert. Klinsky pointed out that previous support levels appear to be turning into resistance levels.

If that is the case next, it may take some time for the S&P 500 to return to its all-time highs after setting 57 record closes in 2024.

On Monday, the Nasdaq and Dow Jones also fell, although the declines of both narrowed compared with the intraday. The Nasdaq closed down 1.2%, and the Dow fell about 420 points to 42,574, a drop of 1%.