Tracking The 10-Year Yield With The Russell 2000

December 8, 2014

A lot of attention was given to the Russell 2000’s Death Cross put in this past September and for good reason.

When this small cap index’s 50 DMA crossed below its 200 DMA under the similar technical circumstances of a near/medium-term sideways trend, it has led to serious declines over the last 20 years. This scenario shows clearly in 1998, 2000 through 2002, 2007 into 2008, and in 2011.

RUT Russell 2000 small cap indexEach time period is marked by volatile whipsaws that led to a Death Cross, or even a series of Death Crosses, before all such topping activity gave way to a new downtrend. Highlighting that topping activity are lower highs and lower lows that speak to the sellers taking control even in the context of lots of noisy swings up and down.

All of this seems relevant today considering that the recent Death Cross in the Russell 2000 has been made on a highly volatile period of sideways trading characterized by lower highs and lower lows.

So even as the Dow Jones Industrial Average and the S&P 500 have put in new all-time highs, this small cap index has hung back a bit similar to August/September 2007 on the entrails of likely selling pressure to come.

Perhaps this time will be different and a possibility that can be taken into consideration if the Russell 2000 climbs above 1214 on a multi-week closing basis, but otherwise there is serious precedent to believe that the Russell 2000’s Death Cross is signaling that the current period of sideways trading action is the start of what will likely prove to be at least a 25% correction and probably much more.

This bearish possibility takes on more significance, in my view, when tied together with one of the more reliable Death Cross signals out there or that of the 10-year yield.

10 year US treasury yield index 5-dec-2014As shown in the 20-year chart to the left, its major Death Crosses offered excellent signals of risk-off as early as July 1997, mid-2000, and again in September 2007, just after the Russell 2000’s August Death Cross, with both marking a year of very volatile trading made up of lower highs that eventually gave way to an all-out stock market crash as the credit and housing bubble burst.

Considering that the 10-year yield put in a Death Cross this past April and one that is holding beautifully with both the 50 and 200 DMAs sloping sharply down, it is worth connecting that bearish for yield/bullish for bond price event with the Russell 2000’s Death Cross.

When each of these marketplaces has shown a Death Cross/series of Death Crosses on periods of sideways chop in the Russell 2000, it has led to stocks selling off and bonds rallying. This is precisely the technical backdrop today, and thus it is worth considering what may be next for stocks after the smokescreen of this year’s noisy trading activity clears.

When the 10-year yield is tracked with the Russell 2000, then, it suggests a serious stock market sell-off is likely ahead.


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