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Small Caps Just Entered A ‘Death Cross,’ A Chart Pattern That Means Trouble For The Stock Market

Small-cap stocks just entered the dreaded death cross, a technical development that traditionally suggests weakness ahead for an asset. And if history is any indication, that may signal trouble for the broader market.

The Russell 2000, comprised of small-cap stocks, has taken it on the chin in recent weeks. On Wednesday, the index's 50-day moving average crossed beneath its 200-day moving average — what would be the "death cross" formation.

The index has also plunged 13 percent from its high at the end of August and sliced through its 200-day moving average amid widespread selling in October.

The last time the Russell 2000 saw a death cross, in 2015, the index plummeted another 17 percent to the so-called Dimon bottom in early 2016.

"Sometimes I'm quite skeptical on death crosses. Not only do you need the 50-day and 200-day moving averages to cross, but they both have to be declining. That's not always the case. Another thing is that it works really well with some assets, and not so well with others. For instance, it doesn't work well with gold, sending mixed signals all the time. However, in this case, they both work," Matt Maley, equity strategist at Miller Tabak, said Tuesday on CNBC's "Trading Nation."

In other words, not only are both moving averages declining, but the death cross for the Russell 2000 has served a reliable indicator over the years.

"If you took all four of the death crosses we've seen since the credit crisis, the average decline is about 14 percent. That doesn't even include the 42 percent decline we saw in 2008," Maley said, adding that he'd never advise forming an opinion about the market solely on a single technical indicator.

Others are more optimistic on the group's next move. Erin Gibbs, portfolio manager at S&P Investment Advisory Services, said she would view this juncture as an entry point for investors.

"They've certainly been more volatile for the fourth quarter, and we see this as more of a shift of investors moving away from some of the riskier assets, particularly as interest rates are really starting to ramp up. So this is natural, and we've seen valuations basically hit the five-year low, and they've now bounced back to 18 times forward [earnings] for small caps," she said Tuesday on "Trading Nation."

The Russell 2000 was higher on Wednesday despite the technical breakdown.

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