Small-cap stocks may be on the cusp of a turnaround.
The Russell 2000's underperformance so far this year is likely to recede in the short term, said Katie Stockton, market technician at Fairlead Strategies.
“We have some confidence that small-cap stocks are going to do better. They probably won't outperform by a lot, but it's been a very difficult year because the breadth has been very weak. It will be a better year for small-cap stocks,” said the company's founder. the managing partner told CNBC's “Fast Money” on Wednesday.
So far this year, the Russell 2000 is down 2%. Meanwhile, the S&P 500, Dow, and Nasdaq 100 hit record highs.
Stockton believes the drop in the Russell 2000 has shaken investor confidence in small-cap stocks.
“We've seen short-term oversold conditions, the initial reaction to IWM and the Russell 2000 ETF, so we want to re-instill that confidence,” he said. “This has improved relative performance. The long-term downside momentum for the S&P 500 has improved.”
Russell 2000 is coming off a strong fourth quarter. It rose about 14% during this period.
“For IWM, we saw a pretty significant trading range breakout in the fourth quarter,” Stockton said. “This is what we expected as there was a positive divergence in momentum as it leveled out with so much volatility.”
CNBC anna gleason Contributed to this article.
