The Small Cap Stock Index Posts a 'Death Cross.' What Happens Next?

The Russell 2000 small-cap index appeared poised for a significant event—an occurrence known as a "death cross."

‍

A death cross takes place when the 50-day moving average, which traders use to gauge short-term trends, dips below the 200-day moving average, which represents the longer-term trend. This technical pattern is often seen as an indication that a shorter-term decline is transitioning into a more prolonged downtrend.

‍

By the afternoon, the Russell 2000 (RUT) had fallen 0.4%, trading near 2,073. According to FactSet data, its 50-day moving average stood at 2,202.03, while its 200-day moving average was at 2,203.19. Despite the index rebounding after closing at 1,993.69 on March 13—the lowest settlement since May 1 of the previous year—it remained more than 18% below its 52-week high from November 24. This decline put it close to the 20% threshold that typically signals a bear market.

‍

However, as MarketWatch’s Tomi Kilgore pointed out, a death cross is not necessarily a precise market-timing indicator since these formations tend to develop gradually and are often anticipated well in advance.

‍

The last time the Russell 2000 exhibited a death-cross pattern was on October 13, 2023. It later exited the pattern when the 50-day moving average climbed back above the 200-day moving average on December 29, 2023. Historical data compiled by Dow Jones Market Data suggests that, while the index tends to struggle in the short term after a death cross, its performance improves over the long run.

‍

This day proved to be a turbulent session for U.S. equities. The Dow Jones Industrial Average (DJIA) declined more than 100 points, or 0.3%, while the S&P 500 (SPX) dropped 0.5%, and the Nasdaq Composite (COMP) slid 0.7%. The S&P 500 had recently joined the Nasdaq and the Russell 2000 in correction territory, a term used to describe a decline of 10% or more from a recent peak.

‍

The broader market remains under pressure amid ongoing economic concerns, uncertainty surrounding interest rates, and volatility in corporate earnings. Investors are closely monitoring technical signals like the death cross for potential indications of further weakness, but history suggests that such patterns are more reflective of past trends than predictive of future movements.

‍

In the coming weeks, traders will be watching to see whether the Russell 2000 stabilizes or if its decline deepens. While short-term weakness is common after a death cross, long-term investors may find opportunities if the index follows historical patterns of eventual recovery.

‍