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This could be a big problem for stocks

Talking Numbers

This could be a big problem for stocks

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This could be a big problem for stocks

This could be a big problem for stocks
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Have small caps run into some big problems?

While large-cap indices like the S&P 500 and the Dow Jones Industrial Average make new records, the small-cap benchmark Russell 2000 index is actually down 5 percent from its recent highs. In fact, it’s down for the year.

Could this be a problem for the overall market? Ari Wald, head of technical analysis at Oppenheimer & Co., thinks it could be.

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“The concern here is that not all market averages are continuing to move higher in unison,” Waldsaid. “The big cap/small cap relationship is one of those things that we’re looking at where the S&P 500 out to new bull market highs [while] The Russell 2000 – the gage of the small-cap stocks – [is] having trouble with resistance from March.”

(Watch: Stocks mixed, with Nasdaq hit by valuation worry)

Wald said the March 4 and July 3 highs in the Russell 2000 may have some thinking a double top in the works. “I think maybe Russell 2000 just moves sideways [and] underperforms the S&P 500,” he said.” But if things do hit a bit of a soft patch here, I think the Russell 2000 is what drags it slower.”

“We’ve been advising clients to stay long what’s working,” Wald added. “Stay long the S&P 500 [and] short the Russell 2000 against it to help neutralize what could be some upcoming volatility.”

(Read: Yellen's 'stretched valuations' remark no surprise)

Gina Sanchez, founder of Chantico Global, agrees with Wald that there should be some concerns about the Russell 2000.

“They’re simply very overvalued,” said Sanchez, a CNBC contributor. “They had a run up that was even more spectacular ahead of this…. The valuation really didn’t make any sense.”

And then there are the fundamentals of the small-cap companies in the index itself.

“There area huge number of companies within the Russell 2000 that either have no earnings or negative earnings,” Sanchez said. “We’re starting to see some of that… get digested by investors. I think shorting the Russell 2000 even now still makes sense.”

To see the full discussion on the Russell 200, with Wald on the technicals and Sanchez on the fundamentals, watch the above video.

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