Trading Nation

Small stocks may be pointing the way to a big rally

Trading Nation: Small cap stocks slide

Small caps are falling in a big way.

The Russell 2000 is down about 6 percent over the last five weeks, dropping Tuesday for its fifth negative session in six and hitting its lowest level since July.

But these recent losses could be indicative of a secular bull market akin to that of the early 1980s through 2000, according to one technical analyst who sees a familiar pattern in the charts going back more than 30 years.

After 15 years of small-cap outperformance, the market is showing signs "of a secular rotation, we think, into large-cap stocks," Ari Wald, head of technical analysis at Oppenheimer, said Tuesday on "Power Lunch."

Such a pattern and a rotation into large-cap stocks is consistent with the last secular bull market, between 1982 and 2000, Wald said, examining a chart of the relative to the performance of the ratio between the S&P and the Russell 2000 dating back to 1980.

A similar pattern of dips reversing into gains in the market can be seen more recently with a "potential inflection point for large caps," according to Wald's chart.

"The S&P 500 averaged 2.6 percent of annualized outperformance vs. the Russell 2000 through that 18-year period," Wald wrote to CNBC in an email.

The small-cap index is up about 3 percent year to date, however, just barely outperforming the S&P 500 in that time.

"I think there's just some nervousness heading into the election, but if we back up really since most of this year, small caps have been doing quite well, and within a pretty placid market over the past few months," Eddy Elfenbein, editor of the Crossing Wall Street blog, said Tuesday on CNBC's "Power Lunch."

Elfenbein noted that, conversely, the number of stocks in the S&P 500 trading above their 200-day moving averages has fallen from 400 to 300 since late August.

"We've seen the leadership become narrower and narrower each week since then," Elfenbein said, adding that investors are changing their risk assessment considering both a Federal Reserve decision on interest rates this year and the impending election.