Talking Numbers

Get ready for 'serious selling' in small caps: Strategist

Get ready for 'serious selling' in small caps: Strategist


They may be called small caps but so far this year, they're seeing some big losses.

Month-to-date, the Russell 2000 is down 4.65 percent and, if it continues, it will be its worst monthly performance since May 2012. Year-to-date, the small-cap index is down 4 percent.

With the Russell 2000 at 8.4 percent below its March highs and now under its technically significant 200-day moving average, is now the time to bet big on small caps? Gina Sanchez, founder of Chantico Global, recommends against it.

(Read: Are stock market swings the new (or old) normal?)

"I don't think they're cheap here," said Sanchez, a CNBC contributor. "They're actually nine companies in the small cap index that have PE [price-to-earnings multiples] over 1,000."

The overall Russell 2000 index trades at roughly 18.8 forward earnings, according to data from Birinyi Associates. That's a level Sanchez said is challenging.

"When you dig down into the numbers, there are still a lot of companies where you're just sort of going to end in tears," Sanchez said. "This isn't necessarily where you step in."

(Watch: Stocks may get rude awakening: Mohamed El-Erian)

Richard Ross, global technical strategist at Auerbach Grayson, is also negative on the Russell 2000.

"There's a lot about the Russell I do not like and I would not be a buyer here," said Ross, a CNBC contributor. He added that not only is the stock now trading below its 200-day moving average, it's also broken through a trend line that he sees as starting in December 2012.

"That prior support in that trend line becomes resistance on this failed bounce here," Ross said. "We're looking for a retest of that 200-day moving average and, this time, I think we pierce below it, not only on a closing basis but I think on an extenuating basis. I think that decline goes on and on and we could be in for some serious selling here in the Russell 2000."

To see the full discussion on the Russell 2000, with Sanchez on the fundamentals and Ross on the technicals, watch the video above.

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