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Small fortune: Why history tells you to buy small caps now

Lawrence Lewitinn
Lawrence Lewitinn
Talking Numbers

This has been a small year for small caps.

While the large-cap S&P 500 traded at record highs on Tuesday, the small-cap Russell 2000 is barely in the green, up a mere 2 percent on the year.

But according to one technical analyst, the next three months could be very good for the Russell 2000, particularly against the S&P 500.

Ari Wald, head of technical analysis at Oppenheimer & Co., analyzed 35 years of relative performance of the Russell 2000 compared with the S&P 500, and found that the small-cap index averaged over 1 percent higher returns in December than the large-cap benchmark.

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What’s more, Wald determined that December through February were, on average, the three strongest months of outperformance for the Russell 2000 relative to the S&P 500.

“That at least mitigates some of the trend concerns that we’re seeing,” he said. “They could start to perform in line with big caps.”

Wald holds that the Russell 2000’s chart shows potential for a positive move after trading sideways this year. “Recently, we’ve seen the Russell 2000 move back above its 200-day moving average,” he said. “It’s only a matter of time before this index breaks out to the upside.”

Still, investors are concerned about putting their money in small-cap stocks, according to Gina Sanchez, founder of Chantico Global. Her data show that last week, the ETF tracking the Russell 2000 (trading under the ticker symbol IWM) saw $1.8 billion in outflows, second only to the S&P 500 ETF (the SPY) which had $3 billion taken out.

(See: CNBC's Economics coverage)

The IWM “has been losing funds for the last several weeks,” said Sanchez, a CNBC contributor. “There are a lot of companies in the Russell 2000 that still have yet to make any earnings or have negative earnings. … That’s one of the things keeping people on the sidelines.”

“I am a big fan of the U.S. versus everything else right now,” she added. “However, I think there is still a big bifurcation in the small caps between companies that can actually sell stuff and companies that can’t. That’s really what’s weighing [the Russell 2000] down.”