Andy Crowder: Small-cap stocks have had a rough few weeks.
In fact, the decline has been so sharp that for the first time in seventeen months the Russell 2000 touched its 200-day moving average. The 200-day is an important level because a breach of the line oftentimes signals a long-term trend change.
It’s certainly worth keeping a close eye on. There have been 11 times where the Russell 2000 broke below its 200-day moving average after spending over 200-days trading above that level. In almost every occurrence, the small-cap index was lower several weeks later and the returns were still overwhelmingly negative after three months.
Should we really be surprised to see a stock market correction?
We’ve gone months without a “normal” correction. And from a seasonal perspective, the timing couldn’t be more perfect. “Sell in May” is just beginning to enter the minds of investors. And as history has shown, the period between May and October have been overwhelmingly bearish for the market.
How bearish? A $10,000 investment in the S&P 60 years ago would equate to approximately $446,000 during the months of November-April. In comparison, the May-October timeframe saw a paltry gain of $6,544.
We’ve already witnessed an 8.7% decline in the small caps, and if history holds true we should expect to see more losses going forward. Just remember, many analysts consider a 10% to 20% correction normal, so now is certainly not the time to panic. Of course, precautions should be taken, but more importantly, you should be excited about the prospects ahead. Stock market corrections lead to opportunities.