Russell 2000 / S&P500 ratio & triple Death Cross

<p>As small cap stocks get damaged, the Russell 2000 / SPX500 ratio is down 12% from its March highs. The last time the ratio fell […]</p>

As small cap stocks get damaged, the Russell 2000 / SPX500 ratio is down 12% from its March highs. The last time the ratio fell more than 12% from peak to trough was during the Sep-Dec 2008 decline, which was followed by the crash in the main indices. In the US, small cap stocks are those firms with capitalization between $300 million and $2 billion. With evidence showing that a rising US dollar begins to hurt smaller cap stocks before it spills over onto bigger cap companies, this would be another excuse to wave the red flag warning for larger cap stocks.

Ominous ratio 

While the S&P 500 has risen 8.3% for the year, the Russell 2000 has fallen 5% year-to-date and down nearly 9% from its June highs. In September alone, the Russel2000 is down 6%. On a relative basis, the Russell 2000 / S&P500 ratio fell 12.5% from its 2014 highs, the biggest peak-to-trough slide since the 15% plunge in September-December 2008.

Triple Death Cross

Those familiar with Death Cross formations in technical analysis, whereby moving averages fall below longer term moving averages, the Russell 2000 witnessed a case of “Triple Death Cross”, as the 55-day moving average fell below both the 100 and 200-day moving averages last week, five weeks after the 100-day moving average fell below the 200-day moving average. The last time the 55-DMA crossed below the 200-DMA on the Russell 2000 was in August 2012.

The bulls’ case against the Death Cross

The bulls may argue against the effectiveness of the 55-100 Death Cross by indicating that over the last eight years, in the five occasions when the 55-DMA crossed below the 200-DMA, only two occasions pointed were followed by prolonged declines and the other three cases led to limited declines in the index, or, a quick snap back in the 55-DMA above the 200-DMA.

Russell, VIX & FTSE

While the bullish case for stocks and against the Death Cross on the Russell 2000 may have some empirical validity, the combination of lower highs and a potential triple top on the weekly chart, suggests another 3% decline towards the 1,085 base is possible. A break/close below 1,080 will likely bring up the next destination near 1,050, coinciding with the 100-weekly MA.

Meanwhile, the landscape from the VIX index suggests the September climb will be built on next month, with a 21.00 print viable in the midst of US earnings season. A decline in the Dow Jones Industrials and the S&P00 index to 16,500 and 1,900 respectively could be just the prelude to an acrimonious month, driven by the end of the Fed QE3 program, the start of earnings season and corporate rumblings of dollar strength. Technically, the FTSE-100 appears the most vulnerable to add to its 4.7% decline and recall the 6,100 level, just above its 200-week moving average.

Russel SPX ratio Sep 30

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