Small cap stocks may be on the cusp of a turnaround.
According to Fairlead Strategies market technician Katie Stockton, the Russell 2000‘s underperformance so far this year is likely a near-term setback.
“We’re kind of convinced that we’ll see small caps do better. Maybe they don’t outperform strongly. But a better year for them after what was a very difficult year for them because breadth was so weak, ” the firm’s founder and managing partner told CNBC’s “Fast Money” on Wednesday.
Stockton believes the Russell 2000’s decline has shaken investors’ confidence in small caps.
“We want to sort of re-instill that confidence because we’ve seen an initial reaction to a short-term oversold condition — that’s IWM or the Russell 2000 ETF,” she said. “With that, we have improvement in relative performance: Long-term downside momentum versus the S&P 500 has improved.”
The Russell 2000 is coming off a strong fourth quarter. It rallied by almost 14% in that period.
“For IWM, we saw a pretty major trading range breakout in Q4,” Stockton said. “It’s something that we had anticipated because there were some positive divergences in momentum as it had gone sideways with a ton of volatility.”
CNBC’s Anna Gleason contributed to this article.