Russell 2000 Death Cross Trading Strategy: Backtesting and Returns Analysis
A Russell 2000 Death Cross occurs when the 50-day moving average of the Russell 2000 index crosses below its 200-day moving average. This is often seen as a bearish signal, but a new study by Rob Hanna on his blog QuantifiableEdges suggests otherwise. Let’s look at the Russell 2000 death cross trading strategy.
Rob Hanna examined all Russell Death Crosses since 1988 and found that the S&P 500 actually rose 84% of the time in the following year. The biggest winner was in 2020 when the S&P 500 gained over 60%.
However, he also found that drawdowns were generally sizable, even for the winners. This suggests that the Russell Death Cross is far from a “perfect signal”, but it may be worth watching for investors concerned about a potential market downturn.
Russell 2000 death cross trading strategy backtest
This is a strategy that is very easy to backtest, but we let Hanna’s results speak for itself (read Rob Hanna’s backtest here):
Please note that the backtest was performed on the respective cash indexes, not the ETFs.
Here is a summary of Rob Hanna’s findings:
- There have been 25 Russell Death Crosses since 1988.
- The S&P 500 rose in 21 of those cases (84%).
- The biggest winner was in 2020, when the S&P 500 gained 60.8%.
- The most recent Russell Death Cross occurred in 2022, and the S&P 500 has fallen since then.
- Drawdowns were generally sizable, even for the winners.
Russell 2000 death cross trading strategy – equity curve
Here’s the equity curve of the strategy:
Rob Hanna concludes that the Russell Death Cross is not a perfect signal, but it may be worth watching for investors who are concerned about a potential market downturn.
It is important to note that the Russell 2000 is a small-cap index, and small-cap stocks are generally more volatile than large-cap stocks. This means that the Russell Death Cross may not be as reliable a signal for the S&P 500 as it is for the Russell 2000 itself.
(For more information on this topic, see Quantifiable Edges’ post from April 23, 2023)
FAQ:
Why is the Russell 2000 Death Cross considered a bearish signal?
A Russell 2000 Death Cross occurs when the 50-day moving average of the Russell 2000 index crosses below its 200-day moving average. This is often considered a bearish signal in trading. The Russell 2000 Death Cross is viewed as bearish because it indicates a potential downturn in the market. However, a study by Rob Hanna found some interesting insights challenging this perception.
What did Rob Hanna’s study reveal about the Russell Death Cross?
Rob Hanna’s study on Russell Death Crosses since 1988 revealed that the S&P 500 actually rose 84% of the time in the year following a Death Cross. Despite this, he noted sizable drawdowns, suggesting it’s not a perfect signal. There have been 25 Russell Death Crosses since 1988, according to Rob Hanna’s study.
When was the most recent Russell Death Cross, and what happened to the S&P 500 afterward?
In 21 out of 25 cases, the S&P 500 rose following a Russell Death Cross, with the biggest winner being in 2020 when it gained over 60%. The most recent Russell Death Cross occurred in 2022, and the study notes that the S&P 500 has fallen since then. The study suggests that the Russell Death Cross may not be as reliable for the S&P 500 as it is for the Russell 2000. Small-cap stocks, which the Russell 2000 represents, are generally more volatile.