The Russell 2000 Has Deteriorated From 'Death Cross' To Full-Blown Correction

It’s ugly out there today.

The Dow is down more than 250 points, the S&P 500 is down more than 1%, and the Nasdaq is down more than 1.6%.

But there is another index, the Russell 2000, that has had an even rougher go of it. Last month, the 50-day moving average price crossed below the 200-day moving average in a technical phenomenon known as the ‘death cross.

On Tuesday, the Russell 2000, which houses small- and mid-cap stocks, was down 1.2%. From its most recent highs, it’s down 10% meaning that the index is in a correction.

The S&P 500, meanwhile, is still more than 6% away from a correction and has gone more than twice its historical average number of days since its last 10% slide, which came all the way back in the spring of 2012.

In a recent note to clients, Jonathan Golub at RBC Capital Markets wrote that while the small-cap index has performed better than the larger-cap indexes during the market’s recovery from the financial crisis, many stocks in the index are currently seeing valuations contract, which Golub attributes to a shift in investor sentiment.

David Bianco at Deutsche Bank wrote in a note that growth expectations for Russell 2000 stocks are still too high for 2015, and added that rising rates and disappointing results will continue to pressure valuations for Russell stocks.

In other words, Golub and Bianco believe this correction is a correction in valuations, which means it won’t necessarily bring the rest of the market down with it.

Here’s the ugly action the Russell year-to-date, and a move that is certain to have investors asking: are the other indexes next?

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