Why the stock market's pullback from record highs is more painful than it appears

• S&P 500 fell 3% since December 6, but market internals show deeper damage.
• Only 19% of S&P 500 stocks have risen since the market's peak, with most down 5% or more in that time.
• Market breadth measures warn of potential weakness, but some experts see a buying opportunity.

The S&P 500's decline since its record high on December 6 is nothing unusual. The index was down 3% through Thursday.

But underneath the surface, a lot of damage has been done to the internals of the S&P 500, making the paltry decline more painful for investors.

Since December 6, just 19% of stocks within the S&P 500 posted a positive return through Tuesday. More than half of the index's underlying stocks posted a negative return of at least 5%, and about 20% of the index posted losses of nearly 10% or more.

Some of the worst-performing stocks during this time period include Chipotle, down 11%; Palo Alto Networks, down 12%; and Adobe, down 23%.

Other technical indicators have showcased most stocks' overwhelmingly negative trading environment over the past six weeks.

One popular technical breadth measure, the percentage of S&P 500 stocks above their 200-day moving averages, plunged from about 75% on December 6 to as low as 50% on Monday, hitting its lowest level since November 2023.

According to Adam Turnquist, chief technical strategist for LPL Financial, the 25 percentage point plunge in the popular market breadth measure, coinciding with just a 4% drop in the S&P 500 index, is a warning sign for investors, at least in the short term.

"This divergence between price and breadth implies fewer and fewer stocks participated in the post-Election Day breakout to new highs," Turnquist said in a note on Monday. "While these deviations can persist for extended periods, they often foreshadow building vulnerabilities of a rally susceptible to stalling."

Turnquist warned that if the percentage of S&P 500 stocks above their 200-day moving average dips below 48%, future returns could be weak, with average 12-month forward returns at -7.3% when that happens based on historical data.

Turnquist highlighted the S&P 500's rising 200-day moving average at about 5,585 as a logical area of support for the index. A move to that level would represent further downside of 6% from current levels and a peak-to-trough decline of about 8%.

Another measure of the deterioration in market breadth is the equal-weighted S&P 500 index, which has declined as much as 7% since December 6, nearly double the S&P 500's decline over the same time period.

Dan Greenhaus, chief strategist at Solus Alternative Asset Management, highlighted the breadth divergence in an interview with CNBC on Tuesday.

"There's been huge drops in some of these stocks. AMD, Micron down 30%, 40%, 50% from their highs," Greenhaus said. "You're doing a disservice by looking merely at the headline and saying, 'well, stocks are down 3%, 4%, 5% from the highs.' I think that obviously misses the larger story."

Ultimately, as damaging as the recent sell-off has been to the stock market's internals, Turnquist sees it as a buying opportunity for investors, even if it continues to trend lower.

"The silver lining to a deeper drawdown is that it could provide a buying opportunity back into this bull market, as most importantly, the S&P 500 remains above its longer-term uptrend, and fundamentals are on solid footing," Turnquist said.

Greenhaus agrees, telling CNBC that specifically for the growing AI story and broader technology sector, as long as the fundamentals stay strong, putting money to work at these levels makes sense.

"If you believe that a lot of those stories remain intact, then this is a tremendous buying opportunity," Greenhaus said.