Warning Signs of US Stock Market Crash Reappear as in 2018 and 2022? Fed Tightening and US Treasury Supply Hit Amid Worsening Market Breadth, Liquidity Crisis May Be Approaching

According to Zhitong Finance APP, liquidity pressures may not have yet surfaced on the market, but as the breadth of both the stock and bond markets continues to deteriorate, these pressures are building internally within the market. The U.S. Treasury plans to issue an additional $317 billion in net new Treasury bills by December, and with the Federal Reserve tightening monetary policy, liquidity conditions could deteriorate further.

Market Breadth is Deteriorating

There are many ways to measure liquidity and its impact on the market, but one of the simplest methods is to observe market breadth. Whether it’s NYSE equities or high-yield bonds, the message is the same—the breadth of the market is worsening.

The NYSE Advance-Decline Line has fallen almost 4% since its peak on August 14. Over the same period, the S&P 500 Equal-Weight ETF dropped nearly 5%, while the S&P 500 spot index declined by only about 2%. This reminds investors that a strong benchmark index performance does not necessarily mean the entire market is robust.

Additionally, the NYSE McClellan Summation Index—another indicator measuring market breadth—has recently fallen to its lowest level since the spring of 2025, and even broke below the March 2026 low. At that time, the S&P 500 stood at about 6,350 points, while the benchmark index is now around 7,600 points.

In the past six months, the NYSE McClellan Summation Index has tried twice to break above 500 points but failed both times and has since dropped back below zero. This indicates that the market lacks the necessary breadth and liquidity to support further gains in the S&P 500.

The high-yield bond market is also showing signs of deteriorating breadth, with its advance-decline line turning downward in recent weeks. Similar destructive trends appeared before stock market declines in late 2018 and before the sell-off in 2022. In both 2018 and 2022, similar conditions saw the S&P 500 drop by around 20% or more.

Fed Rate Hikes and Treasury Issuance May Add Pressure

This time may be an exception, but the current backdrop is very similar to 2018 and 2022. In 2018, the Fed was in a rate hike cycle and market breadth in high-yield bonds deteriorated; in 2021, this also occurred just before the Fed began to raise rates. The Fed has already started a new rate hike cycle, though how much further rates will rise from here remains unknown.

This is important as tighter monetary policy should ultimately tighten financial conditions, which may reduce liquidity. In periods of tightened financial conditions, breadth in the high-yield bond market historically deteriorates; therefore, as the Fed attempts to transmit monetary policy through financial markets and the broader economy, this is an important indicator to watch.

The only bit of good news is that the U.S. Treasury plans to reduce the General Account balance by $100 billion by December 31, from $950 billion on September 30 to $850 billion. This means that in the first fiscal quarter, T-bill issuance is expected to drop from $409 billion in the fourth quarter to $317 billion. Still, this means there will be over $700 billion in net new Treasury bills over six months, and their cumulative impact still needs to be absorbed somewhere.

One place to observe signs of such pressure is in the trading volume behind the Secured Overnight Financing Rate (SOFR). Volumes have fallen from around $3.5 trillion at the start of the year to about $3 trillion. As funds in the Fed’s overnight reverse repo facility are nearly exhausted, there is no excess cash left in the market to absorb extra Treasury issuance. As a result, funds to purchase these Treasuries are increasingly needing to come from the repo market. With the U.S. Treasury continuously issuing more Treasuries than are maturing, any further decline in funding volumes could mean that market liquidity is under increasing pressure.

Sustained large-scale Treasury issuance combined with the Fed's rate hike cycle may put further pressure on liquidity as the market enters October and November. Given that the breadth of both the equity and high-yield bond markets has already deteriorated while secured overnight financing volumes are declining, the market may be more vulnerable than what the major indices suggest. If these trends persist, the risk of a significantly larger correction in the S&P 500 will increase further.