Small caps are getting pricey, but there's still opportunities to be found, says Citigroup strategist Lori Calvasina.

"I don't think the first half of the year is the time to pull out of small caps. I think there's a trade out in the second half, I don't think we're there yet," she said. (See list on page 2 of this story for small-cap stocks recommended by Citigroup.)

Oliver Quilla for CNBC.com

Typically, small caps lead coming out of a recession.

"They tend to beat large caps and what we've also found is typically 12 months after a recession is over you also tend to see that outperformance continue. As far as where we are in the cycle you are still at a stage from the recession perspective where small caps should e leading," she said.

Calvasina said she thinks small caps are in the same type of cycle they were in at the end of the 1982/83 recession.

"What happened in that cycle is at the bottom of the recession we looked a little pricey, but not too expensive. But then late in 1983, we got the peak on corporate profits and we saw the growth rate pull in. Typically, when you see that growth rate pull in that's something that triggers a sell off in small caps."

Another trigger investors should watch for is the availability of and demand for credit. The Fed's senior loan survey this week showed that the tightening of credit by banks has stabilized but there's still no a pickup in loan demand.

"The net percent of banks tightening standards for (commercial and industrial) loans plunged again," she said. "As long as credit is getting easier in that metric, you're typically going to see small caps outperform. When spreads are tightening, small caps are doing better than large."

"I think there's still some gas left in the tank on the credit indicators. When they start to flatten out, stop improving, even though credit will be better, that's your trigger to get out," Calvasina said.

The Russell 2000 has gained 78 percent since the market's March lows, outpacing the 62 percent gain in the S&P 500. For the month of January, the Russell 2000 lost about 3.7 percent, roughly the same as the S&P.

But interestingly, Calvasina points out that the Russell has been outperforming emerging markets lately. "We looked at the Russell 2000, relative to the MSCI emerging markets and what we found in terms of relative valuation, when we looked at trailing p/e, we basically found you are extremely cheap in small caps versus emerging markets and it's about as cheap as it's been since the late 1990s," she said.

She said the MSCI index was down about 9.4 percent from its mid-January peak, while the Russell earlier this week was down only about 6 percent from the same period. "This is the second month in a row now that small caps have beaten emerging markets on the MSCI index," she said.