Talking Numbers

Here why the small cap rally may be, well, small

Here why the small cap rally may be, well, small

Will the small-cap revival be short-lived?

The small-cap benchmark, the Russell 2000 index, has gained 3 percent in the past five trading sessions. But, while the S&P 500 is at all-time highs, the Russell 2000 is still down on the year.

Gina Sanchez, founder of Chantico Global, thinks stocks in the Russell 2000 are dividing themselves between those of high quality and those of low quality.

"Small caps have an enormous amount of companies that have no earnings or negative earnings," said Sanchez, a CNBC contributor. "Valuations there are going to have to be revisited. You might get some support in small caps from large-cap companies that have tons of cash that are looking for acquisition targets. But, other than that, I think small caps are going to continue to bifurcate."

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The Russell's performance has confounded many market participants this year, including Richard Ross, global technical strategist at Auerbach Grayson.

"I'm vexed here on the Russell," said Ross, a "Talking Numbers" contributor. "I've been bearish on the Russell for some time. The bearish call in the broader market hasn't worked out, but we did have a very nice pullback in the Russell – a 10- percent correction."

The Russell 2000 has support at around 1,080, according to Ross. That level is the neckline of a rounded top formation that began in November. On Wednesday, the Russell 2000 closed at 1,136.68.

But Ross' longer-term chart shows more downward potential for the index. Since the market bottom in 2009, the index has stayed above a single uptrend line. But, it's the index's relationship with the 150-week moving average, currently at 912, that has Ross worried for it.

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"Back in 2011, the index topped out 38 percent above the 150-week moving average," Ross notes. "Just recently, we were 35, almost 36, percent above that 150-week moving average. Now, we haven't closed below that in over four years. I think we're due for a test of that long-term 150-week moving average."

The key point will be if the 1,080 support level holds. Ross doesn't believe it will.

"Look for a break of that multiyear trend line, a break of that 1,080 horizontal support, and a pretty sharp decline down to that long-term moving average," Ross warns.

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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