There’s been a lot of talk about the death cross emerging in the charts of the Russell 2000. However, you probably haven’t heard about this: There are some technical analysts, including me, who believe the pattern may be bullish over the long-term. That’s right – bullish!
Last night, one of my charts was featured on Off the Charts with Jim Cramer!
From my perspective, conventional wisdom does not apply to an index of small cap stocks. Using information compiled by Ryan Detrick from SeeItMarket.com, there have been 19 death crosses in the Russell 2000 since December 1988.
Yes, they were bearish in the very near-term. Initially, the Russell 2000 tumbled, selling off an average of 1.92 percent in the first five days after the death cross. However, on average, the losses quickly began to reverse.
According to the research, the Russell 2000 was only down an average of 0.7 percent 10 days later. Three months later, the Russell 2000 had gained an average gain of 1.57 percent. Believe it or not, from there, the historical patterns actually turn very bullish. Six months after a death cross, the Russell 2000 had rallied, on average, 7.54 percent, and a year later posted an average gain of nearly 12 percent.
If you really want to get wonky, the median figures for the index’s last 19 death crosses are even more positive, with the median example giving you a 4 percent gain after three months, an 11.8 percent gain after six months, and a 17.4 percent gain after 12 months.
