The rally in small caps is likely far from over even with the big gains so far

Published Thu, Dec 10 20207:01 AM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

Small caps are up more than 20% since the start of November, and they should still lead the broad market higher into 2021. "If you look at the Russell 2000, it's up 90% from the March 18 low. We now have two-thirds of the Russell 2000 trading 10% or more above their 200-day moving average," said Jefferies equity strategist Steven DeSanctis. "The last time we saw that was September, 2009. Here, we had the big downturn like we did in '08/'09. We had January, February, March and now we're exploding to the upside." The Russell 2000 was lower Wednesday, off 0.8% to 1,902. DeSanctis said small caps should take a pause. "We're getting extended. The idea about the pause that refreshes makes very good sense at this point," he said. "We're up another 5% month-to-date and it just keeps going." DeSanctis said it's hard to say whether the Russell is ready to pull back yet. "It's had a great run. There's definitely a lot of momentum in the market. It's year end. You never know. Between now and early next year, I definitely see things cooling off for a short period of time," he said. "A 5% to 10% pullback would definitely be healthy." DeSanctis has a target of 2,050 on the small cap Russell 2000 for next year. It was trading at just about 1,900 Wednesday, off its recent all-time high of 1,935, and well above the 966 of March. Since Nov. 1, DeSanctis said $8.2 billion flowed into small cap ETFs. "It was entirely into small cap core and growth," he said. The ETFs reflecting those - the iShares Russell 2000, or IWM, and the iShares Russell 2000 Value IWN have been lagging the iShares Russell 2000 Growth ETF IWO. "The Russell 2000 Growth is trading over 40 times forward earnings. That's expensive. Small value is about 19 times. That's historically expensive," he said. "The growth index is a little over its skis with the way performance has been, the way valuations are." But he said fundamentals for the small names are solid in general, with earnings expected to be up 40% next year and the economy expected to recover. There should be plenty of merger activity and that's a positive for the market. Ari Wald, technical analyst at Oppenheimer, said the market is poised for more gains, with small caps in the lead. "What we see is this turn toward small caps after what's bene an extended period of large caps outperforming. That really dates back to 2013," said Wald. "Now, we're seeing small caps lead the way as the economy tries to climb out of recession...It's a text book early cycle play, and they're doing it again." Wald said the area of small caps that were holding up when the rest were weakening was growth. That includes his preferred sectors of tech and health care. If stocks take a pause, Wald said it's more likely to be after the Santa rally. But he expects small caps to continue to do well next year. He does not set a target for the Russell 2000, but he does expect small caps to continue to lead as the economy recovers. "Markets typically are up 11% in the second year of a bull cycle, which would put us something north of 4,000 on the S & P 500. Since 1928, this has been the best nine months off a low through history," Wald said.

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Small caps are up more than 20% since the start of November, and they should still lead the broad market higher into 2021.

"If you look at the Russell 2000, it's up 90% from the March 18 low. We now have two-thirds of the Russell 2000 trading 10% or more above their 200-day moving average," said Jefferies equity strategist Steven DeSanctis. "The last time we saw that was September, 2009. Here, we had the big downturn like we did in '08/'09. We had January, February, March and now we're exploding to the upside."

The Russell 2000 was lower Wednesday, off 0.8% to 1,902.