The small-cap index just fell below its 200-day moving average
We've been covering all angles of the recent stock market weakness, including volatility spikes, massive options bets on the SPDR S&P 500 ETF Trust (SPY), and unusual inflows for safe-haven assets. Now, we're turning our attention to small-cap stocks; specifically, the Russell 2000 Index (RUT), which closed below its 200-day moving average for the first time in over a year on Thursday. We decided to look at historical returns to see what a breach of this key technical level could mean for the RUT going forward.
To be exact, the Russell 2000 Index went 286 straight trading days without falling below its 200-day moving average. Schaeffer's Senior Quantitative Analyst Rocky White looked back at previous occasions when the index went more than one year -- 252 trading days -- without breaching the trendline, noting that yesterday marked just the eighth time since 1979 such a signal occurred.
As you can see, you'd have to go back to May 2014 for the last signal. Prior to that, the last time the RUT fell below the 200-day following a year trading above it was all the way back in 2004. While these two occasions were followed by strong stock gains over the next six months, the post-signal returns taken as a whole are much less appealing -- especially compared to the index's "anytime" returns.
The chart above shows that, on average, small-cap stocks have tended to struggle following similar breaches of the 200-day moving average. The average returns for the RUT are lower across the board, from two weeks out to six months out -- and drastically so. Compare the average post-signal six-month loss of 0.05% to the index's anytime six-month return of 5.08%.
Plus, the same time frame shows a positive return rate of 66.3% for the Russell 2000, while the index has been positive three months after a signal just 57.1% of the time. No matter how you slice it, the RUT falling below the 200-day is a bearish signal for small-cap stocks, if we let history be our guide.