Market Analysis: Three Signs of a Bear Market in 2025

The Three Signs of a Bear Market in 2025

As we navigate the complex financial landscape of 2025, investors and analysts are closely watching for signs that might indicate the end of the current bull market. Dave Keller, founder of Market Misbehavior and president of Sierra Alpha Research, has identified three critical indicators that could signal the onset of a bear market. These signs are particularly noteworthy because they often appear when market conditions still seem favorable, and major indices like the S&P 500 and NASDAQ are reaching new all-time highs.

1. Bearish Momentum Divergences

The first sign of a potential bear market is the appearance of bearish momentum divergences. This occurs when prices continue to rise, but momentum indicators show a downward trend. Let's examine some examples:

Nvidia (NVDA)

In October and November 2024, Nvidia's stock price continued to make higher highs, reaching around $150 on an adjusted basis. However, the Relative Strength Index (RSI) began to slope downwards during this period. This divergence between price action and momentum was one of the earliest warning signs observed in the market.

S&P 500

The S&P 500 showed strong momentum readings in October, November, and December 2024. However, as the index stalled around 6100 points in late January 2025, a bearish momentum divergence became apparent. The RSI peaked in early December and showed lower readings as the S&P 500 made new highs in January.

Alphabet (GOOGL)

Alphabet's stock also exhibited a bearish momentum divergence in early February 2025. While the price reached new highs, the RSI failed to match its previous peak from December.

Financial Sector

Even value sectors like financials showed signs of divergence. For example, Synchrony Financial (SYF) made higher price highs from November 2024 to January 2025, but its RSI readings declined over the same period.

It's important to note that not all stocks show these divergences. Meta Platforms (META), for instance, continued to make new highs with strong momentum, with its RSI around 80 in February 2025.

2. Breadth Conditions Not Confirming New Highs

The second sign involves market breadth indicators failing to confirm new highs in major indices. Breadth indicators measure market participation and can provide insights into the health of a market trend.

Cumulative Advance-Decline Lines

Keller examined cumulative advance-decline lines for various market segments, including the New York Stock Exchange, S&P large-cap, mid-cap, and small-cap indexes. These indicators all peaked around Thanksgiving 2024 and made lower highs in January 2025, even as the S&P 500 reached new all-time highs.

Percentage of Stocks Above Moving Averages

Two key breadth indicators showed concerning trends:

1. Percentage of S&P 500 stocks above their 200-day moving average:

   • September 2024: 82%
   • November 2024: 76%
   • January 2025: 65%
   • February 2025: 60%

2. Percentage of S&P 500 stocks above their 50-day moving average:

   • September 2024: 83-85%
   • November 2024: 70%
   • January 2025: 60%
   • February 2025: 54%

These declining percentages indicate that fewer stocks are participating in the market's upward trend, even as major indices reach new highs.

Hindenburg Omen

The Hindenburg Omen, a classic market top indicator, gave a valid sell signal in December 2024. This indicator combines various market breadth components and has historically signaled potential market tops.

3. Dow Theory Non-Confirmation

The third sign of a potential bear market is a non-confirmation between different market segments, based on Dow Theory principles.

Classic Dow Theory

Traditionally, Dow Theory looks at the Dow Jones Industrial Average and the Dow Jones Transportation Average. As of February 2025, neither of these indices was making new highs, with the Transportation Average significantly below its fourth-quarter 2024 high.

Modern Dow Theory

Keller proposes a modern version of Dow Theory, comparing an equal-weighted S&P 500 index with an equal-weighted NASDAQ 100 index. As of February 2025, there was a potential non-confirmation:

• The equal-weighted NASDAQ 100 made a new all-time high
• The equal-weighted S&P 500 remained well below its late November 2024 high

This divergence between "old economy" and "new economy" indexes could be a warning sign if it persists.

Implications and Outlook

While these three signs of a bear market are present in February 2025, it's crucial to note that they are not definitive predictors of an imminent market downturn. They serve as warning signals, suggesting caution and limited upside potential.

Investors should watch for key support levels and potential breakdowns in individual stocks and sectors. Some notable observations:

• Alphabet (GOOGL) has broken below its 50-day moving average
• Nvidia (NVDA) has broken below key support levels
• Amazon (AMZN) is pulling back to an ascending 50-day moving average, showing resilience

The market has not yet seen widespread bearish rotation or price breakdowns that would fully validate these bearish signals. However, these potential "lines in the sand" should be closely monitored in the coming weeks and months.

Conclusion

As we navigate the financial markets of 2025, the presence of these three bearish indicators – momentum divergences, weakening breadth, and Dow Theory non-confirmation – suggests that investors should remain vigilant. While the major indices may continue to reach new highs in the near term, these underlying weaknesses could be early warning signs of a market transition.

Investors should consider:

• Reviewing their portfolios for stocks showing bearish divergences
• Monitoring market breadth indicators for further deterioration
• Watching for breakdowns below key support levels in major stocks and indices
• Considering defensive strategies or increasing cash positions if more concrete bearish signals emerge

Remember that no single indicator or set of indicators can predict market movements with certainty. It's essential to combine technical analysis with fundamental research and to maintain a well-diversified portfolio aligned with your long-term financial goals.

As always, staying informed and adaptable will be key to navigating the potential challenges and opportunities that lie ahead in the ever-evolving financial markets of 2025 and beyond.

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