Small-cap stocks are making big moves.
The Russell 2000 has rallied nearly 4 percent so far this year, outpacing the S&P 500 (up nearly 1 percent in the same time) and the Dow (down a bit less than 1 percent). Some market watchers see further room to run.
The group will continue rallying as the U.S. dollar gains ground, said Ari Wald, head of technical analysis at Oppenheimer. The dollar index has indeed surged this year, hitting a fresh 2018 high on Wednesday before turning modestly lower on the session.
In fact, since the dollar’s 2018 low in February, small-cap stocks have outperformed large caps across every sector, according to an analysis from Bespoke Investment Group.
“The recent move higher has reversed the dollar’s yearlong decline. We think the dollar does continue to stabilize, to move higher here, with resistance at the 95 level for the [U.S. dollar index], that we see some near-term upside, and I think the implications of that is that small caps do well,” Wald said Tuesday on CNBC’s “Trading Nation.”
Small-cap stocks typically benefit when the dollar gains in value, whereas larger-cap stocks and multinational companies tend to feel the heat under the same conditions. Smaller companies deal with more domestic sales, typically without the burden of having to translate overseas revenue from foreign currencies back into dollar terms.
“Looking at the relative ratio between the Russell 2000 and the S&P 500, you’re seeing small caps begin to outperform versus the large caps, in conjunction with that turn in the dollar, and we think that continues. We’re especially bullish on small-cap growth,” Wald said.
The dollar is certainly going to be a headwind for the S&P 500 over small-cap stocks, said Stacey Gilbert, head of derivative strategy at Susquehanna. Small-cap companies also should feel benefits from tax reform, Gilbert said Tuesday on “Trading Nation.”
Options in the IWM, an ETF tracking the Russell 2000 and the SPY, an ETF tracking the S&P 500, are trading relatively close to the same price as a percent of their underlying index price, Gilbert said. This is a notably rare occurrence, and one that prompts Gilbert to suggest playing the options in small caps.
“Relative to the risk that’s being priced into large caps, I think it’s very attractive on the small-cap side,” on a risk-reward basis, she said.
The Russell 2000 was up half a percent Wednesday.