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Here's the big problem with the rally: Louise Yamada

Stocks just closed out their best month in four years, with the S&P 500 rising more than 8 percent. But master technical analyst Louise Yamada says there's something a bit off about the recent move higher.

The founder of Louise Yamada Technical Research Advisors said the notable lag of small-cap stocks, namely the Russell 2000, could be signaling an unsustainable rally.

"We still have concerns about the breadth of the rally," Yamada said Monday on CNBC's "Trading Nation." "If it's going to really succeed and undo some of our bearish concerns, then I think you have to see the small- and mid-cap stocks join in."

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The Russell 2000 was the best-performing major U.S. index Monday, rising more than 2 percent and out of correction territory. However, the small-cap index is still down 1.5 percent year to date and has yet to break back above its August highs.

Yamada said she is looking for the Russell to return to near all-time high levels, as other major indexes have done. The S&P 500 closed within 1.4 percent of its all-time intraday high on Monday. The Dow Jones industrial average and the Nasdaq composite also closed within 3 and 2 percent of their highs, respectively, and the Nasdaq 100 traded above its all-time bubble record close.

But for the last two years, the Russell has been in a sideways consolidation pattern, Yamada said, which could be a warning sign.

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"[This has] been very prevalent among stocks that break out artificially and then fall back into the trading range and eventually break the support. So that's something that we want to watch very carefully," she said.


Without participation from small-cap stocks, Yamada said the market could see a reversal in the next several months.

"If we were to look back at history at some of the other tops that we've seen in place, you get very dynamic rallies that can carry up to and even through the old highs, and then roll over and the next leg can emerge on the downside," she said.


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