• A Major Small Cap Warning?

    by  • March 13, 2014 3:34 pm • Breaking News, Broad Market Analysis

    My pal Jonathan Krinsky, chief market technician at MKM Partners, recently did a killer study on the Russell 2000 (RUT) being 40% above it’s 200-week MA.  Turns out, he found it is the most extended above this trendline since March 10, 2000.  Also previous trips up over 40% above this trendline have resulted in very poor returns going out.

    You can read his discussion with Steven Russolillo of the WSJ here.  But this is the key point.

    Over the past 30 years, there have been 40 weeks (or 2.5% of the time) in which the Russell has traded at least 40% above its 200-week moving average, Mr. Krinsky says. Six of those weeks have taken place over the past three months. But in 32 of the 34 other occurrences, the Russell traded down over the next three months, averaging a 7% drop.

    Here’s a great chart as well.

    For fun, I decided to take a look as well.  We only have RUT data going back to ‘87 and the first signal with that is actually ‘93.  Similar to what Jonathan found, the results are across the board bearish looking.

    Since ‘93, here are all the times it happened and results after.  Check out the year later results, had an amazing string of 21 straight lower a year later from ‘97 to ‘00.  Now it was actually higher the three times it happened in ‘06, worth noting.

    As I like to say around here – ‘it is what it is.’  Very tough to spin this any way other than very concerning for small caps going out near-term to a year out.

     

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