Small-caps continue to stay safe as they have not hit 20% below 200-day MA – Oppenheimer

Selling small-caps has historically provided a correction hedge due to their mean-reverting tendencies, but the Russell 2000 (NYSEARCA:IWM) is still below the extended thresholds that have been followed by below-average returns, according to Oppenheimer analysts.

Until then, they still see a “frothy sentiment” lingering.

In a Technical Analysis Inflection Points report, analysts said that “the Russell 2000 (IWM) has shown a reliable gauge of ‘so bad, it’s good’ and ‘so good, it’s bad’.”

Since 1986, the Russell 2000 (IWM) posted its best returns when it was at least 20% below its 200-day moving average, and its poorest returns when it was at least 20% above its 200-day moving average.

“Currently about 7.5% above its smoothed trend, we’re siding with the index’s directional improvement, and our belief that a breakout from its 18-month range offers untapped firepower for the equity market,” analysts said.

If the benchmark rallies into a 2,200-2,400 resistance range, it would be the first potential warning that the bull cycle is topped.

Four small-cap, buy-rated stocks are: Transcat Inc. (TRNS), Prestige Consumer Healthcare Inc. (PBH), Zeta Global Holdings Corp. (ZETA), and Rush Street Interactive Inc. (RSI).