Small-cap stocks are signaling big gains for the broad market, according to one trader.
The Russell 2000 index has been surging, outperforming the large-cap S&P 500 index over the last week, month and three months. And that could signal the next leg higher for the broader market.
"I've been paying attention to the Russell 2000 that's been outperforming both the S&P and Nasdaq. That's a bullish sign for the broader stock market," Todd Gordon told CNBC's "Trading Nation" on Tuesday. The small-cap index is up 2 percent since the start of June while the S&P 500 and Nasdaq have risen less than 1 percent.
Looking at a chart of the IWM, the ETF that tracks small caps, Gordon noted that since the late April high of $115, the ETF has rallied further, gaining more than 2 percent.
But what really had Gordon convinced Tuesday morning that the rally was about to heat up was when the large-cap S&P 500 breached its respective April high. The next confirmation for Gordon will be when the Nasdaq breaks above its 2016 high, which it is just points away from.
"Small caps generally can act as a leading indicator to where broader markets can go," said the founder of TradingAnalysis.com. "They have a historical precedent of doing that and I believe this is no different."