Market Insider

Time to worry? Russell 2000 hits 'death cross'

Small-cap stocks hit 'death cross'
Small-cap stocks hit 'death cross'

The Russell 2000 has been diverging from the broader market over the last several weeks, and now technicians point out it has flashed a bearish signal. For the first time in more than two years, the small-cap index has hit a so-called death cross.

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A death cross occurs when a nearer-term 50-day moving average falls below a longer-term, 200-day moving average. Technicians argue that a death cross can be a bearish sign.

Trader on the floor of the New York Stock Exchange.
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While traders have already been quite bearish on the Russell 2000 so far this quarter, no other major U.S. index is near its death cross.

The small-cap index has far underperformed the broader markets during the quarter, falling 5.3 percent versus the rising 1.7 percent and the Nasdaq composite climbing 2.5 percent over the last 12 weeks.

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More evidence of the recent weakness in small-cap stocks: the Russell 2000 is currently about 7 percent below its all-time high set at the start of the quarter on July 1, while both the Dow and S&P 500 are just off their own record levels hit last week.

Hitting a death cross could potentially propel the Russell 2000 lower and push the index closer to correction territory, a significant level watched by traders that is 10 percent below this index's all-time high.

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The last time the Russell 2000 hit a death cross was in July 2012, but no sell-off followed as the index quickly bounced off that level and continued its uptrend.

A year before that death cross, though, in August 2011, the index hit a death cross and trended lower in the short term. However, that dip was headline-driven, spurred by Standard & Poor's stripping the U.S. of its AAA credit rating.

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(Death crosses circled.)