With small caps higher in four of the last five sessions, market talk has turned to whether they've hit rock bottom—and some strategists say maybe not yet.
Lori Calvasina, Credit Suisse small- and mid-cap strategist, says the Russell 2000 stocks are so overvalued, they could continue to fall.
"The problem is, the valuations are just so bad, even if you had a little relief rally here, I'd still be selling them," she said. Calvasina expects the Russell to end the year at 1,160, but says it could even drop to 1,000 before moving higher.
"I think there's more pain unfortunately," she said. "I think we're going to go down before it goes up."
The Russell rose 1 percent Thursday to 1,113, and it is now up 1.6 percent in the last week. The gained just 0.2 percent to 1,892, and the Dow was up less than 0.1 percent to 16,543. The Nasdaq, which had moved lower when the Russell was selling off, saw bigger gains than the large-cap indexes, rising more than a half percent to 4,154.
Michael O'Rourke, chief market strategist at Jones Trading, says one thing that may have changed in the last several sessions—the big divergence between the Russell and the S&P 500. While it may still lag, it will likely move more in line with the big-cap index instead of in the opposite direction.
The Russell has been as much as 10 percent off its March high, while the S&P 500 has gained more than a percent in the same period. It is now 8.2 percent off its all-time high, while the S&P is off just 0.3 percent from its all-time high of May 13.
"I think the Russell still has issues to work through, and while it's consolidating here, it may not break down at all, but the impression I'm getting is we're a week or two away from what the next move is … I would tend to think it's going to be down, but I think it's going to be largely dependent on the S&P," he said.
Calvasina said she's cautious because there are still questions about whether growth will pick up as much as economists expect.
"My stocks tend to beat large caps when economic expectations are getting better and they tend to lag when economic expectations are coming down," she said, adding proof of more robust, consistent growth of 3 percent or more could turn her bullish again.
She expects the Russell to be flat to lower this year, after revising an earlier forecast of a 14 percent gain. She said the rolling, forward 12-month price-earnings ratio of 18.2 is rich, though it's off the high of 19.6 back in December.
The average gain for the Russell in the year after the forward P/E is at 18, is about 4 percent and the market is up 64 percent of the time, but when the P/E is more than 19, the odds change, she said. Historically, that has preceded a decline in the Russell two-thirds of the time, for an average 12-month forward decline of 2 percent.
Calvasina also said the price-to-sales measure of Russell 2000 stocks is 1.54, on a 12-month trailing basis. That is based on a weighted average of the constituents and is about 50 percent above the norm and 0.1 off the all-time high. That measure alone is signaling a double-digit decline if you look at historic returns, she noted.
"This is one of the most eye-popping charts we send to people," she said. "That's in line with where we were in the tech bubble."
Traders have been concerned that the Russell's selloff could spread like poison to the broader market. But some strategists believe the Russell could remain isolated, as it was driven higher—and then lower—along with momentum names in the Internet sector and biotech.
Daniel Greenhaus, chief global strategist at BTIG, said he thinks the Russell is starting to bottom.
"There's no way to prove it but my feeling is small caps are bottoming," Greenhaus said, noting he does not necessarily see any further selloff in the Russell to spread to big caps.
Greenhaus also believes the S&P 500 could be in a sideways correction, and has made that call since February. Since late February, the S&P has not moved more than 5 percent between its high and low, the smallest three-month range since 2006.
"Just look at the action since early March. Since the 4th, which is when the Russell peaked, the Russell is down 7.8 percent, and the S&P is up 1.1 percent. So don't take my word for it, the market actions says large caps can ignore the decline in small caps ... I also wouldn't get excited about large caps because small caps are bottoming."
O'Rourke said if the Russell were to trade much lower, traders would start to watch for the negative "death cross" chart pattern, where the 50-day moving average (now at 1,141) passes through the 200 day (1,117), suggesting negative momentum.
"A phase of consolidation for a month at the 1,100 level would be healthy," he said.
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—By CNBC's Patti Domm. Follow her on Twitter @pattidomm.