Behind the strange small-cap underperformance

Small-cap stocks have underperformed large caps lately. The Russell 2000 is down 5.2 percent in the past week and 6.8 percent in the past month, versus S&P 500 declines of 3 percent and 5.3 percent, respectively.

The small-cap lag comes despite a market environment in which smaller companies might be expected to do better. After all, one of the biggest current worries is global growth, and Russell 2000 businesses tend to be more domestic-focused than those in the S&P 500.

But to Boris Schlossberg of BK Asset Management, the recent dive in the Russell reflects market dynamics more than fundamental factors.

Schlossberg argues that due to the prolifation of ETFs, many individual investors who might previously have been invested in individual small-cap stocks are now in large caps instead. That means that swift-moving hedge funds play a greater role in that segment of the equity market.

Read MoreToday's market looks like 2000 and 2007: Technical analyst

"Now that everyone is in (DIA) and (SPY), small caps are left to highly opportunistic hedgies," Schlossberg wrote to CNBC on Tuesday, referring to ETFs tracking the Dow and S&P, respectively.

These funds "exit the trades faster, and leave small caps to rot."

From a technical analysis perspective, Rich Ross of Evercore ISI believes the Russell has recently found an important level of long-term support at its 150-week moving average, which it is currently trading around now.

For Ross, that means the small-cap selling could soon be over.


Trades to Watch

Trader Bios


Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

Read more