Small-caps speed ahead of market, but large-caps are still where the money lies, says market watcher

Posted by jbrumley on March 12, 2018 12:52 PM

By Keris Lahiff, CNBC

Small-cap stocks have seen some big gains in the past week. The index rose 2.5 percent and just logged its best five-day stretch since mid-February. But rather than jumping in, one longtime market watcher says now might be the time to make a trade.

"Large-cap value is still going to outperform anything small-cap," Michael Bapis, partner and managing director at the Bapis Group at HighTower Advisors, told CNBC's "Trading Nation" on Thursday.

That has been the case before this week's breakout. The Russell 2000, the benchmark index for small-caps in the U.S., has added just over 2 percent in the year to date, falling behind the S&P 500's 4 percent rise in 2018. In 2017 the S&P 500 rose nearly 20 percent, while the Russell climbed 13 percent.

While small-caps have held up relatively well during the sell-offs of recent weeks, a return to regular volatility in the market could hit the sector far worse, says Bapis. Small-caps tend to be the most susceptible to big swings in broader markets.

"Given the recent volatility and the volatility that we foresee for the next six to 12 months, the alpha is going to be generated on the large-cap names, growth and value, and small-caps are going to continue to fluctuate and struggle," added Bapis.

Still, its recovery over the past month from an early February sell-off has been solid, says Craig Johnson, chief market technician at Piper Jaffray.

"This index has pulled right back in the February setback to the 200-day moving average, rallied 10 percent above this and is also now back above its 50-day moving average," Johnson said on "Trading Nation" on Thursday.

That's far better than the Dow Jones industrial average's comeback, he says. The Russell 2000 dipped below its 200-day moving average on Feb. 8, the second day the Dow swung lower by more than 1,000 points. The Russell quickly regained a level above that moving average and surfaced above its 50-day moving average just 10 days later.

By comparison, the Dow fell below its 50-day moving average on Feb. 5, briefly broke above it at the end of February, and has yet to trade meaningfully above that level in March.

"Most people are very focused on large-cap growth-driven stocks at this point in time and a rotation and a style change towards small-cap to me is something very interesting and something we need to continue to watch," added Johnson.