Tue. Nov 30th, 2021

CHAPEL HILL, NC – Small-cap stocks have not entered a bear market.

It is worth noting that last week the Russell 2000 index closed below the 200-day moving average, after having been above it for several months. Many stock market technicians believe that breaking the 200-day moving average indicates that the main trend could shift from bearish to bearish.

Russell’s RUT 2000,
+ 1.88%

+ 1.90%
history does not support this belief. On average over the past four decades, the index has not performed worse than average after these signals.

Let’s take what happened last September 23, when this small capitalization benchmark closed below the 200-day moving average after having been above it several months earlier. Far from continuing to decline, the index responded to this bearish market signal with a sharp rise. Today it is more than 50% higher than it was then.

Something similar could be happening this time as well. Since violating its 200-day moving average last week, the Russell 2000 index has risen sharply and is now more than 3% higher.

Certainly, these recent experiences constitute more anecdotal than rigorous statistical evidence. But they are consistent with the historical record.

This graph shows the performance of the Russell 2000 since 1987, after the days when it closed below the 200-day moving average, after having surpassed it the day before. On average, over the next six months, the index gained 3.75%. This is almost identical to the three-month average gain of 3.78% after days that are exactly the opposite, days when the Russell 2000 closed the envelope her moving average of 200 days after being below her the day before.

The difference on the 12-month horizon is slightly larger: an average gain of 7.73% after closing first below the 200-day moving average, compared to 8.31% after closing for about. However, even this difference is not significant at the 95% confidence level that statisticians typically use to determine if a pattern is genuine.

Much larger differences emerge when we compare every day after the Russell 2000 has exceeded its average mobile days with every day after it has crossed below. In this case, the performance of the index is much higher when it is below the moving average and not above. This is just the opposite of what is assumed by conventional wisdom.

The same goes for the S&P 500

No wonder what I found for the Russell 2000 index, as it is consistent with what is also true for the S&P 500 SPX index,
+ 0.85%.
Think of an extensive study done a few years ago by a research intern in my office. He calculated the performance since the mid-1920s of the S&P 500 trading rules based on the 200-day average, under various assumptions, and was left empty.

For example, he found that, with realistic assumptions, a 200-day moving average-based trading strategy failed to overcome a buy-and-hold approach for many of the 1920s and 1980s. From the 1990s onwards, it lagged behind even in the most favorable cases.

Be careful how you put these conclusions into practice. Keep in mind that a bear market could start at any time. The results presented here only mean that if a bear market starts in the next few days, it won’t be because the Russell 2000 index last week broke below the 200-day moving average.

Mark Hulbert regularly contributes to MarketWatch. His Hulbert Ratings keeps track of investment bulletins that pay a fixed fee to be audited. You can contact him at [email protected].

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