Small cap stocks may be on the cusp of a turnaround. According to Fairlead Strategies market technician Katie Stockton, the Russell 2000’s underperformance so far this year is likely a near-term setback.
“We’re kind of convinced that we’ll see small caps do better. Maybe they don’t outperform strongly. But a better year for them after what was a very difficult year for them because breadth was so weak,” the firm’s founder and managing partner told CNBC’s “Fast Money” on Wednesday.
So far this year, the Russell 2000 is off two percent. Meanwhile, the S&P 500, Dow, and Nasdaq 100 have hit new all-time highs. Stockton believes the Russell 2000’s decline has shaken investors’ confidence in small caps.
“We want to sort of re-instill that confidence because we’ve seen an initial reaction to a short-term oversold condition — that’s IWM or the Russell 2000 ETF,” she said. “With that, we have improvement in relative performance: Long-term downside momentum versus the S&P 500 has improved.”
The Russell 2000 is coming off a strong fourth quarter. It rallied by almost 14% in that period.
“For IWM, we saw a pretty major trading range breakout in Q4,” Stockton said. “It’s something that we had anticipated because there were some positive divergences in momentum as it had gone sideways with a ton of volatility.”
Investors have been concerned about the underperformance of small cap stocks this year, but according to Katie Stockton, it might be time for a turnaround. The Russell 2000 has underperformed so far this year, but there are signs that things may be about to change.
Stockton believes that small caps will see a better year ahead, even if they don’t outperform strongly. The decline of the Russell 2000 has shaken confidence in small caps, but there are indications that a short-term oversold condition is pointing towards improvement in relative performance.
In the fourth quarter, the Russell 2000 performed well, rallying almost 14%. The trading range breakout was a major positive for small caps and indicates that there may be better days ahead. Positive momentum and volatility are signs that the small cap market may be seeing a turnaround.
While there are no guarantees in the stock market, the signs are positive for a potential turnaround in small cap stocks. Keep an eye on the Russell 2000 and the IWM ETF in the coming months. As always, it’s important to carefully consider your investment decisions and consult with a financial advisor before making any significant changes to your portfolio.
CNBC’s Anna Gleason contributed to this article.
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