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One group of small-cap stocks could outperform, Oppenheimer says

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One group of small cap stocks could outperform: Oppenheimer

Small caps surged to begin the week.

The IWM ETF, which mirrors the small-cap-focused Russell 2000, rallied 4% on Monday, outpacing the 1.5% gain on the S&P 500.

There could be one slice of the group poised to outperform the rest, small-cap momentum stocks, said Ari Wald, head of technical analysis at Oppenheimer.

"Momentum is the market anomaly in which stocks that have outperformed over the prior 12 months have a strong track record of continuing their outperformance," Wald told CNBC's "Trading Nation" on Monday. "As the basis of our investment strategy, we're encouraged that it's working in this environment, too. For instance, the small-cap momentum ETF has rallied through big resistance relative to the Russell 2000,"

The DWAS small-cap momentum ETF is up 13% this month, better than gains for the IWM and the S&P 500

"We see this as a part of a larger breakout dating back to 2013 and suggests they should continue to outperform within the small cap universe," Wald said.

Investors' portfolios should be exposed to small caps as part of a diversified strategy, said John Petrides, portfolio manager at Tocqueville Asset Management.

""We do recommend an allocation to small caps, ... given the sell-off but also more importantly given the quantitative easing that the Federal Reserve has done [which] has provided wind in the sails for small caps, which I think is why you've seen the rally really over the past six weeks," Petrides said during the same segment.

But he said that some stocks in the small-cap space may be no-touch here.

"There are going to be pockets that are going to have trouble within the small-cap universe," he said. "Clearly energy, small-cap energy companies are going to have a hard time with oil prices depressed, and also small-cap banks. The longer that the economy is shut down, the harder it is for the banking sector and you start questioning what kind of liquidity the small-cap banks have, but by and large we think the asset class is attractive here."

Some of the worst performers in the Russell 2000 this year have been energy companies such as Nabors Industries, QEP Resources and Pacific Drilling. The KRE regional banking ETF, which holds a majority of banking stocks with a market cap of less than $2 billion, is down 37% this year. 

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