Russell 2000 Death Cross: Chill Out!

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On Monday, the Russell 2000 Index finally gave us a much-discussed and much-feared “death cross”… a chart-based event that suggests more downside is inevitable.

Ditto for its ETF counterpart, the iShares Russell 2000 Index Fund (IWM).

Traders didn’t overlook the signal, either. The market was buzzing about the possibility before Monday, but now that the worry has become reality, the headlines have become even more alarmist regarding the Russell 2000 and/or IWM.

Yet, the market’s accepted truths aren’t always on target.

Can investors really count on this so-called death cross? Or is the Russell 2000 apt to survive the signal without any major setback?

What history says might surprise you.

What’s a Death Cross?

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Veteran market technicians likely already know what a death cross is, but an explanation might be in order for the trading layperson.

A death cross is the term used to describe a stock’s (or index’s) 50-day moving average line falls below its 200-day moving average line.

The premise is, when the trend remains bearish enough for long enough to significantly alter the direction of the intermediate-term’s primary indicator (the 50-day moving average line), that chart’s bearish momentum is too strong to stop without a hard landing. The downtrend simply must run its course until a hard — and usually painful — landing is made.

It’s not an unreasonable assumption, either, for the Russell 2000 or any other index … or even an individual stock.

As they say, though, the charts don’t lie.

Previous Death Crosses for the Russell 2000

The last time we saw a death cross for the Russell 2000 was on Sept. 11, 2011. Problem: By the time the death cross materialized, the vast majority of the pullback was in the rear-view mirror. One more good decent-sized dip about a month later, and the rebound began.

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The death cross before that was on July 28, 2010. Like the one that would play out a little more than a year later, one more minor lull would clean up the last of any lingering bearish problems and kick off a major rally. The bulk of any damage that was to be done around that time had already been done by the time the death cross actually formed.

Russell 2000

Before that, the last time the Russell 2000 gave us a death cross was on Oct. 8, 2008. This bearish cross of its key moving average lines was a rather late signal, missing a big chunk of the pullback it signaled. It still caught a decent-sized piece of the weakness, though.

Either way, this death cross signal might be a bit questionable as we were in the throes of a bear market by this time; any chart that even looked like it led to a bearish outcome.

Russell 2000

The Russell 2000 gave us a death cross back on Sept. 4, 2007, as well — the one that really kicked off the bear market. One could argue this particular cross accurately signaled the beginning of the bear market, and maybe it did.

Then again, everything eventually signaled a bear market at some point between 2007 and 2008.

Russell 2007

Ironically, during the most damaging phase of the 2008 bear market between Sept. 19 and Oct. 14, the death cross signal was actually “off.”

Before the bear market got going in late 2007, we saw a death cross from the Russell 2000 on July 21, 2006. As had been the case so many times before, the bulk of any downside had already played out. Indeed, this particular death cross would have been the ideal time to get into the Russell 2000 or IWM.

Russell 2000

The death cross the Russell 2000 made on May 25, 2005, was a comically bad sell signal.

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Bottom Line

While Monday’s death cross might coincide with disaster for the Russell 2000, it’s difficult to say it would be the cause of any major pullback for small-cap stocks … or large-cap stocks, for that matter.

If the market is going to implode, it’s got much bigger — and better — reasons to do so. Among them is the fact that September is generally a bearish time of year for stocks. Another is the oddly high valuations stocks are trading at right now.

The current death cross pales in comparison as a reason to worry.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/09/russell-2000-death-cross/.

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