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Small caps’ best win streak in five years is flashing a bullish signal to the S&P 500

Small caps' best win streak since 2013 is a bullish signal, market watcher says

The Russell 2000 hasn’t seen this kind of winning streak since 2013.

After eight straight weeks of gains, history suggests small caps are flashing a big buy signal to all stocks.

“We took a look at future returns after these long weekly win streaks on the Russell 2000, sure enough small caps continued to do well. What’s more interesting, though, is the S&P 500 actually does a little bit better,” Ryan Detrick, senior market strategist at LPL Financial, told CNBC’s “Trading Nation” on Tuesday.

The past nine times the Russell 2000 had a winning streak that stretched over at least eight consecutive weeks, the posted an average 6.4 percent gain in the following six months. Over those same periods, the Russell 2000 added an average 4.3 percent.

“Small-cap leadership is a good thing,” he added. “It could be carving the way potentially for this bull market to continue as the S&P’s second half of the year also does well.”

While the Russell 2000’s hot streak has cooled off this week, it had risen every single week since early May. The small-cap index has added 8 percent this year, while trade fears have dinged the S&P 500 and capped its year-to-date gains at nearly 2 percent.

Historical returns back up the bull case for the S&P 500, but Detrick still expects a bumpier path higher for the benchmark index.

“This is going to be anything but smooth. Last year spoiled us all. We expect more of a rocky ride. Two 10 percent corrections already this year on the S&P 500, went a couple years without one,” he said.

The underlying fundamentals, led by the best earnings growth since 2010, keep Detrick bullish on the S&P 500 for the second half of the year.

“When you have double-digit earnings growth, the S&P is higher every single time since 1990 (12 out of 12 times),” said Detrick. “Earnings drive long-term gains. We’ll still side with the bulls here led by earnings.”

The S&P 500 is expected to post 21 percent earnings growth for the full year as tax cuts passed in December give rise to companies’ bottom lines. The second-quarter earnings season, also expected to show off double-digit gains, will kick off with the big banks in mid-July.