Small-Cap Stocks Face Second ‘Death Cross’: Signs of a Turnaround?
Small-cap stocks experienced a significant setback recently as the Russell 2000 index, tracking these companies, registered its second ‘death cross’ of the year. This development, indicating a potential bearish trend, has prompted discussions about the future of small-cap stocks and the possibility of a recovery.
Understanding the ‘Death Cross’
A ‘death cross’ occurs when an index, currency pair, or security’s 50-day moving average falls below its 200-day moving average. Traders often interpret this technical indicator as a signal that a selloff is gaining momentum.
This latest ‘death cross’ on the Russell 2000, as reported by Dow Jones Market Data, marked the first occurrence since April 21. Importantly, it marked the first time that the index recorded two ‘death crosses’ within the same calendar year.
A Year of Struggles for Small Caps
Throughout the year, small-cap stocks have faced challenges, consistently underperforming their larger counterparts. This trend continued as crude oil prices surged, and investors sought refuge in Treasury bonds and gold, with gold recording its most significant daily gain since December, according to FactSet data.
On the day of the ‘death cross,’ the Russell 2000 (RUT) experienced an 0.8% decline, closing at 1,719.71 points. Among major indexes, only the Nasdaq Composite and Nasdaq 100 saw more substantial selloffs, each declining by 1.2%.
Historical Trends: What Lies Ahead
Despite the short-term bearish signal, historical data provides some optimism for small-cap investors. Dow Jones Market Data indicates that, following previous ‘death crosses,’ the Russell 2000 typically rebounded strongly in the six and twelve months that followed.
One month after previous ‘death crosses,’ the Russell experienced an average decline of 0.2%. However, it managed to gain 6.7% six months later and an impressive 15% one year later.
Context of Small-Cap Challenges
Small-cap stocks have encountered multiple hurdles throughout the year. Soaring interest rates and rising Treasury yields have placed significant pressure on these smaller firms, which are generally more sensitive to higher borrowing costs compared to their larger counterparts.
Notably, the Russell’s value relative to the high-performing Nasdaq 100 recently reached an all-time low. This trend surpassed levels observed during the peak of the dot-com bubble in March 2000, according to an analysis of historical data from Koyfin.
In conclusion, the recent ‘death cross’ on the Russell 2000 has sparked discussions about the future direction of small-cap stocks. While they face short-term challenges, historical patterns suggest the potential for a rebound in the coming months. Investors will closely monitor market developments to see if small-cap stocks can overcome recent setbacks and regain their footing in the ever-evolving financial landscape.
