Is the Russell 2000 Index (RUT) 'Death Cross' a Reason to Panic?

Examining the Russell 2000 Index's (RUT) historic performance, following a 'death cross'

Aug 12, 2015 at 2:34 PM
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We've spent the past couple days talking about "death crosses" -- specifically, the one that occurred earlier this week on the Dow. With the stock market getting burned again today, it's no surprise that we're seeing yet another death cross, this time on the Russell 2000 Index (RUT).

As a refresher, a death cross transpires when a "faster" (or short-term) moving average crosses below a "slower" (or longer-term) moving average. Based on the name, you can probably guess that the technical signal is bearish. In the case of the RUT, the 10-day moving average has just slipped below the 200-day trendline for the first time since September 2014.

So, the question is -- just how bearish has the death cross been for the small-cap index? In the table below, Schaeffer's Senior Quantitative Analyst Rocky White answers that question by quantifying the RUT's post-signal performance going back to 1990. At the end of the day, the results are pretty inconclusive. While the RUT's average one-week post-signal gain of 0.02% is less than the typical anytime gain of 0.2%, by three months, the results are roughly equal in terms of both average gain (2.6% for both) and percent positive (69% vs. 64%).

150812rutdeathcross1

Probing more deeply, the chart below looks at the last 20 death crosses and the RUT's performance across several time frames. As you can see, it's quite the mixed bag. The last time the 10-day trendline breached the 200-day (September 2014), the RUT had a rough few weeks before eventually bouncing back. Prior to that, though, small caps seemed to do pretty well following the signal -- just look at those 2012 and 2014 returns. Long story short, it doesn't seem that today's death cross is a reason to panic.

150812rutdeathcross2

 

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