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Small-cap stocks are quietly outperforming, and the run may continue — for now

Small caps are quietly outperforming. But can the run continue?
Small caps are quietly outperforming. But can the run continue?

While investors have been focused on large-cap tech and the surge in commodities, small-cap stocks have quietly come within a stone's throw of the recent all-time highs.

The is up 0.5 percent and the Dow is down 0.5 percent since the start of 2018, but the Russell 2000 has risen 2.3 percent. Furthermore, the S&P 500 is still more than 6 percent off its record high, while the Russell 2000 is less than 3 percent from its all-time high. Some market watchers see the run continuing, at least in the short-term.

"I think the small-cap rally has been much a flight to safety, away from geopolitical concerns, tariff issues, and all the things that bother the multinationals. The safety trade has been to go to small-caps, which are much more U.S.-centric," said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management, Wednesday on CNBC's "Trading Nation."

"But here's the rub. The U.S.-centric case really rests on the U.S. economy picking up pace from 2.5 percent to perhaps 3 percent growth, and so far, you don't really see that in the data," Schlossberg said, specifically pointing to tepid growth across ISM measures and smaller surveys of growth, like the Empire State Manufacturing Survey.

He said this may suggest the small-cap stocks' move is temporary, in for a so-called "double-top" on the charts, and not a breakout just yet. He'd exercise caution with the small-cap trade at this time. Schlossberg contended, however, that should growth accelerate in the second half of the year, then "all bets are off," and small-caps should rally further.

The picture looks more optimistic from a technical standpoint, said Katie Stockton, founder and managing partner of Fairlead Strategies. Examining a chart of the IWM, an ETF that tracks the Russell 2000, Stockton said its recent behavior is encouraging about the broader state of the market.

"When you do see outperformance from small-caps, it does tend to reflect a market that has strong breadth, because the small-cap universe is quite large, and that tends to be a positive development, broadly," Stockton said Wednesday on "Trading Nation."

"If you project the trend, you can arrive at a target for the IWM of about 8 percent above current levels, and that would be with a several-month time horizon. I think that's very compelling. That's assuming we see a breakout," she said.

The Russell 2000 and all major indices were trading lower on Thursday.