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Rare RUT Signal May Spell Trouble for Small-Cap Stocks

History suggests the Russell 2000 Index could be in store for a rough few months

Aug 18, 2017 at 2:07 PM
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We've been covering all angles of the recent stock market weakness, including volatility spikes, massive options bets on the SPDR S&P 500 ETF Trust (SPY), and unusual inflows for safe-haven assets. Now, we're turning our attention to small-cap stocks; specifically, the Russell 2000 Index (RUT), which closed below its 200-day moving average for the first time in over a year on Thursday. We decided to look at historical returns to see what a breach of this key technical level could mean for the RUT going forward. 

To be exact, the Russell 2000 Index went 286 straight trading days without falling below its 200-day moving average. Schaeffer's Senior Quantitative Analyst Rocky White looked back at previous occasions when the index went more than one year -- 252 trading days -- without breaching the trendline, noting that yesterday marked just the eighth time since 1979 such a signal occurred.

russell 2000 index

As you can see, you'd have to go back to May 2014 for the last signal. Prior to that, the last time the RUT fell below the 200-day following a year trading above it was all the way back in 2004. While these two occasions were followed by strong stock gains over the next six months, the post-signal returns taken as a whole are much less appealing -- especially compared to the index's "anytime" returns.

rut 2000

The chart above shows that, on average, small-cap stocks have tended to struggle following similar breaches of the 200-day moving average. The average returns for the RUT are lower across the board, from two weeks out to six months out -- and drastically so. Compare the average post-signal six-month loss of 0.05% to the index's anytime six-month return of 5.08%.

Plus, the same time frame shows a positive return rate of 66.3% for the Russell 2000, while the index has been positive three months after a signal just 57.1% of the time. No matter how you slice it, the RUT falling below the 200-day is a bearish signal for small-cap stocks, if we let history be our guide. 

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