Trading Nation

Small-cap stocks just hit an all-time high, but the upside may not last

Trading Nation: Record high for small caps

The small-cap Russell 2000 just touched an all-time high, but some strategists are forecasting downside for the index in the face of a weakening U.S. dollar.

The Russell 2000, which in Monday trading rose to an all-time high and posted its fifth straight session of gains, is still underperforming the large-cap and the Nasdaq 100, pointed out Rich Ross, technical analyst with Evercore ISI.

"Lagging in a global bull market is not a great start. Then, you lay in the U.S. dollar. Typically the small-cap stocks are a strong dollar, U.S.-centric play, as you saw that rally coming out of the election. And what we've seen is the dollar is going straight down," he said.

A stronger greenback relative to foreign currencies is generally a positive relative factor for smaller companies, since they do much of their business domestically, in contrast to larger companies. The dollar has declined nearly 7 percent so far this year.

Furthering Ross' bearish outlook on the group is its streak of losses on a monthly basis — July marks, thus far, the fourth consecutive month of losses for small-cap stocks.

Although a new all-time high was just achieved, Ross said Monday on CNBC's "Power Lunch," the index didn't quite break out decisively. Examining a chart of the Russell 2000 going back to the U.S. election in November, when the stocks surged, Ross pointed out that the index appeared to signal upside out of a trading range formed over the last eight months or so, but has "stalled" at this point.

Furthermore, on a longer-term chart looking back to late 2014, the picture "actually gets a little better and a little worse at the same time. There's a nice big base of support, and a head-and-shoulders bottom, and you see that continuation pattern," Ross said, referring to a technical formation that can signal a reversal in a stock's trend.

"But if we went back in time and looked two years ago, you had a very similar type of base breakout … from which we failed miserably. So I'm a little concerned here," he said.

On the other hand, and in spite of the index's underperformance (the S&P 500 has risen nearly 10 percent year to date, while the Russell 2000 has risen just 5.5 percent in the same time), earnings growth in the small-cap S&P 600 index is expected to rise twice that of the large-cap S&P 500 over the six to 12 months, pointed out Erin Gibbs, S&P Global portfolio manager.

"We'd actually expect investors to take on more risk going forward, and perhaps take on a little more growth in that small-cap arena," she said Monday on "Power Lunch," adding that expected earnings growth is indeed higher even as both the small- and large-cap stocks are around the same valuations relative to their historic valuations.