The performance of small caps could be saying something big about the stock market

Key Points
  • Monday's sell-off was the worst since September, but the behavior of small cap stocks may be a signal the pullback is not likely to be much more severe and the stock market could soon head higher.
  • The Dow and S&P 500 failed to hold support at their 50-day moving average, but the small cap Russell 2000 held above that level, a sign of strength.
People walk by the New York Stock Exchange (NYSE) in lower Manhattan on October 02, 2020 in New York City.
Spencer Platt | Getty Images

In Monday's blustery sell-off, the Dow and S&P 500 fell below an important trend indicator - but not the small cap Russell 2000.

That gives more heft to the belief of some technical strategists that small caps are signaling a broadening of market participation that should help take the entire stock market higher.

The S&P 500, Nasdaq and Dow all fell below their 50-day moving averages, important widely-watched near-term support levels. The S&P and Dow ended Monday below their 50-day moving average which is calculated by averaging the last 50 closing prices.

But the Russell 2000 held above its 50-day, a sign of strength.

"The point is no damage was done on this pullback, and we think the recovery story is in play. We're expecting a broad market breakout. We expect participation to continue to broaden. Our broader theme is cyclical and beta and small caps have that," said Ari Wald, technical analyst at Oppenheimer.