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Small-cap weakness may last for years: Technician

Small-cap stocks have been hit almost twice as hard as the S&P 500, which has fallen more than 5 percent this year. The Russell 2000 has slid 11 percent, and according to Oppenheimer head technician Ari Wald, that may continue for some time.

Wald said the weakness in small-cap stocks is part of a rotation into large-cap names, amid a broader secular bull market.

"We think this is not only going to last for the coming months but potentially for the coming years," Wald said Wednesday on CNBC's "Trading Nation." "[It's] very consistent with the 1980s and 1990s secular bull market, all led by the S&P 500 on the upside."

Despite a bounce in stocks this week, Wald said the S&P 500 and the Russell 2000 will need to see some trend stabilization for a sustained rally. For small-cap stocks, Wald said resistance should come in around the 1,060 level.


Wald recommends selling any rallies in the Russell, and he sees the index falling to as low as 865, which would mean a 14 percent drop from where the Russell closed on Wednesday.

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Larry McDonald, head of U.S. macro strategy at Societe Generale, said he sees small-cap stocks underperforming for at least the next five months.

A lag in small caps has previously been a sign of a faltering economy, he said. While the U.S. isn't necessarily in a recession, he noted, small caps may continue to be a gauge on the overall strength of the economy.

"They were giving us a sign that recession risk was creeping in," McDonald said Wednesday on "Trading Nation." "Typically, until we are at least halfway through the recession, if we get to one, that's where the bottom will be. But they will be a wonderful canary in the coal mine out of the recession."

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