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

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 S&P 500 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.

Videos

Trades to Watch

Trader Bios

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more

Connect