On Monday, the Russell 2000 completed a “Death Cross.”
The Russell is made up of small and mid-cap stocks.
A “Death Cross” is a technical indicator that happens when a security’s 50-day moving average falls below its 200-day moving average.
The very basic, oversimplified idea behind why this is bad is that since a 200-day moving average marks the move of a security — say, a stock — over a longer period of time, it represents a more stable indicator of the stock’s price.
And so if the 50-day moving average, which measures the stock’s price over a shorter period of time, which makes this indicator theoretically less table, crosses below the longer-term average it indicates, to the technical trader, breaking an uptrend.
And as the saying goes, “The trend is your friend.” Until the trend gets broken. Then, presumably, you have no friends?
All in all, the “Death Cross,” probably doesn’t matter all that much. At least on its own.
In a story about the “Death Cross,” CNBC cited the chart below, which shows the last few times this happened for the Russell 2000. Only one of them lead to serious downside move for the index, but that happened in the summer of 2011, which was the depths of the European Sovereign Debt Crisis and the US credit downgrade.
And as UBS’ Art Cashin said in his morning note on Tuesday: “Doing this for 50 years tells me the death cross is more important to the media than to the markets.”
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