The US stock market is going to fall? Small-cap stock index will show a "death cross" signal again in a year!

After the banking crisis and potential economic slowdown, small-cap stocks are struggling to cope with the tightening financial environment.

Since the banking crisis on March 8, the Russell 2000 Index has fallen 4.8%. FactSet data shows that during the same period, the S&P 500 Index and the NASDAQ Composite Index rose 2.2% and 2.8%, respectively.

Death Cross Signal Appears

Last Friday, the Russell 2000 Index formed the so-called "death cross" for the first time since January 2022, which is a technical sell signal.

According to FactSet data, as of Tuesday, the 50-day moving average of the Russell 2000 Index was 1818.35 points, while the 200-day moving average was 1826.48 points.

Many chart watchers believe that when a stock's short-term moving average (usually the 50-day moving average) falls below its long-term moving average (usually the 200-day moving average), it is called a "death cross," which implies that the stock market will further decline and indicates that market action is exhausted.

Jeffrey Buchbinder, chief stock strategist at LPL Financial, said that small-cap stocks may perform weakly in the near future, "they are more sensitive to credit and may enter a recession later this year, which suggests that small-cap stocks should be treated with caution in the near future."

However, many market participants question whether this is really a bearish signal, because historical data shows that the downward trend is sometimes not sustained and is short-lived, and prices often rebound after a brief decline.

"In the past 25 years, the Russell 2000 Index has had 17 'death crosses,' with an average return of negative 1.9% in the following month," Buchbinder said.

"From historical data, the 'death cross' is a good time to sell, but this time, it is best to wait for it to pass. This is a short-term bearish signal within a month, but if you look at three months, the Russell 2000 Index has an average increase of 4% after the 'death cross'," Bunchbinder said.

However, Bunchbinder believes that the valuations of some high-quality small-cap stocks are "attractive" due to the expected mild and short-lived economic recession. "The situation of small-cap stocks may be difficult, but with the possible improvement of the economic environment, there may be some certainty later this year."