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This is what's killing small cap stocks

Talking Numbers

Small cap stocks crossed a big line and it's not a good sign.

For the first time since November 2012, the small cap Russell 2000 closed below its 200-day moving average. Technicians look at such events as potential bearish signals.

And, this may have implications for the general market since investors want to see confirmation in all the broad market indices. Although the large cap S&P 500 is just 1 percent below its record highs, the Russell 2000 is down 8.6 percent from its March peak.

However, Steven Pytlar, chief equity strategist at Prime Executions, sees something positive in the Russell 2000's near-term chart. And, right now, the index is nearing a very critical level, according to Pytlar.

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The 1,100 level in the Russell 2000 is "almost more important than the 200-day moving average," Pytlar said. "It's a major support level over the last several tests. Each time it's come and tested this level, buying interest has picked up, we've seen it bounce, and rally pretty substantially on a couple of tests. So, we don't want to give up on it right now."  

Gina Sanchez, founder of Chantico Global, is more negative on the Russell 2000. She argues that although the index successfully tested the 1,100 level of support in the recent past, it happened at a time when market momentum was positive. Over the past month and a half, however, things are different in a bad way for the index, according to Sanchez.

"The markets themselves have been defensive," said Sanchez, a CNBC contributor. "Russell 2000 stocks in particular are far more pro-cyclical than the S&P 500 or other larger cap stocks. And, they also have the most number of companies that have negative or no earnings."

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One other issue Sanchez said is a problem is the gap in relative valuations between Russell 2000 stocks on the upper end of the valuations spectrum and those on the lower end.  

"You have some incredibly high valuations," Sanchez said. "That is what is being killed. So I see a lot more downside. I'm not sure there's enough positive momentum generally in the market to support [it]. I think this will be different."

To see the full discussion on the Russell 2000, with Pytlar on the technicals and Sanchez on the fundamentals, watch the above video.

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