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Pro: Small-Cap Stocks Are On Fire, But Don't Hold For The Long Term

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Pro: Small-Cap Stocks Are On Fire, But Don't Hold For The Long Term

Small-cap stocks are off to their best start since 1987, with the iShares Russell 2000 Index (NYSE: IWM) up already 8 percent in 2019, said CNBC "Trading Nation" host Mike Santoli. Does this mean investors should be adding exposure to the small-cap group? These two pros debate.

Symptom Of The January Effect?

One of the commonly held theories in investing is the "January effect," in which some of the more beaten up stocks in the prior year outperform in the first month of the year.

Small-cap stocks were down 17 percent in the back half of 2018, while the S&P 500 index was down by just 7 percent, Strategic Wealth Partners' Mark Tepper said during the "Trading Nation" segment.

If the "January effect" trend is accurate, then small-cap stocks that underperformed in 2018 could generate a near-term gain for investors — but those looking for longer-term outperformance may want to reconsider, he said. Small-cap companies are typically more susceptible to economic downturns given the higher debt levels they hold versus large caps. At this stage in the economic cycle, investors should favor large-cap names instead, he said. 

"When the economy slows and eventually contracts, those companies with high debt levels are going to get hit the hardest," Tepper said. 

Chart Pro: No Support Broken

Despite recent momentum in the small-cap universe, the ETF chart has yet to break through any notable support levels, TradingAnalysis.com founder Todd Gordon said during the CNBC segment.

IWM shares are trading around 7 percent below the 200-day moving average of $158, and before it can reach this level, the stock needs to first move above its October and November lows, Gordon said. 

"We have some wood to chop to get to retest that moving average which was lost," he said. "We have old lows here in October and November. That's going to be overhead supply. Anybody who bought those lows would certainly be selling."

Related Links:

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Posted-In: CNBC Mark Tepper Todd Gordon Trading NationSmall Cap Analysis Media Trading Ideas Best of Benzinga

 

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