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.
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
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 S&P 500 rising 1.7 percent and the Nasdaq composite climbing 2.5 percent over the last 12 weeks.
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.
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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