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Small caps at four-year lows, and trader warns of 'more pain'

Small caps roar back, but traders warn of more pain ahead

Small-cap stocks are getting wrecked.

Despite a big bounce Tuesday, the small cap-focused Russell 2000 has tumbled 25% for the month — far worse than the S&P 500's 14% decline. The Russell is now trading at levels not seen since mid-2016.

It could get even worse for this corner of the market, warned Strategic Wealth Partners' president Mark Tepper.

"I would not be buyers of the group right here. I think there's more pain ahead for small caps," Tepper said on CNBC's "Trading Nation" on Tuesday. "Those are the ones that are going to experience more of an impact from this self-imposed lockdown."

The IWM Russell ETF, which tracks the index, has fallen by as much as 20% in just the past week as fears over the economic impact of the coronavirus crisis spiked.

Small caps "were already companies that weren't as healthy as large caps — about 40% of them were making no money before this drawdown. They're more leveraged than large caps, which means they have more debt, and when you make less money and you have to pay more to service your debt, that is not a good combination," Tepper said.

While large-cap stocks have also declined, Oppenheimer head of technical analysis Ari Wald said they could bounce back and outperform even as the smaller market-cap stocks languish.

"Small caps have certainly fallen more than the S&P. … That's a trend that's been in place since 2013 if you look at the Russell 2000 relative to the S&P 500. What I'm highlighting is that this bears similarities to other long-term runs of large-cap outperformance specifically between 1983 and 1999," Wald said during the same segment.

"Overall, aside from the need to base over the near term, we do see these deeply oversold conditions as presenting a long-term opportunity, but we think the opportunity is in large caps and not small," he added.