Small Caps on the Verge of a ‘Death Cross’

Chart of Russell 2000 (RUT) on Verge of Death Cross

Something is happening with small cap stocks that has not occurred since September 2015. The Russell 2000 benchmark index, which represents stocks that have a relatively small market capitalization (generally defined as between $300 million and $2 billion in market cap), is on the verge of what technical analysts call a ‘death cross’. This simply means that the 50-day moving average of the Russell 2000 index has converged with the 200-day moving average to the downside, and could potentially cross over if the index drops further.

Why is this important?

First, a death cross is one of the more important technical analysis indicators for providing clues as to possible future direction. And as the name suggests, this pattern is ominously bearish. Technical analysts consider it one of the most negative and severe signals, especially since it doesn’t happen all too often for the major stock indexes.

Second, although those other benchmark indexes – the Dow, S&P 500, and Nasdaq – are currently far from forming death crosses of their own, the small cap Russell 2000 is often seen as a leading indicator for the rest of the market. Where the small caps go, the large cap indexes are often expected to follow, so this clearly does not bode well for the entire market.

What may be next?

Does this mean that a larger correction or even a crash may be coming? While it probably won’t happen just yet, there are increasing signs that market structure may possibly be in the midst of deteriorating, and investors should be even more wary than usual.

IMPORTANT: The information above should not be construed as investment advice and should not be considered as a solicitation to buy or sell securities. Past performance is not indicative of future results. Trading and investing in the financial markets involves substantial risk of loss, and may not be suitable for all investors.

Disclosure: At the time of this article’s publication, we have no position in any security or trade/investment mentioned, nor do we have any business relationship with any company whose stock may be mentioned.

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