Small cap stocks could see a very volatile week

The small-cap Russell 2000 is coming into focus for one equity strategist this week as the Senate is expected to debate the proposed tax reform bill.

Matt Maley, equity strategist at Miller Tabak, will be watching the small-cap index because it is particularly sensitive to the ebbs and flows of the legislation and decisions that may arise this week. Here's why.

• The index is filled with stocks of small-cap companies, which are largely exposed to the domestic economy, Maley wrote in an email to CNBC on Monday. These corporations would theoretically benefit most from the passage of tax reform.

• The Russell 2000 has appeared to move in tandem with the perceived likelihood that tax reform will pass through both houses of Congress, said Maley, a chart-minded strategist. The Russell 2000 sold off in October, when "many pundits said the tax reform proposals were 'dead on arrival' shortly after they were made public," he wrote.

2-month chart of the Russell 2000

• Though as it has become more evident that the bill was able to gain more traction, he added, the index has had a strong rally in the last two weeks — more than 3 percent.

• Maley will be watching for decisions made in the Senate this week. A handful of Republican senators have yet to voice their support; Sen. Rand Paul, R-Ky., says he plans to vote for the bill despite reservations. If the bill does not pass, that would be a surprise to the market, Maley said, and should cause volatility across the small-caps.

Bottom line: The small-cap Russell 2000 index could see volatility in sessions ahead as the tax bill is debated.


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