Small caps break to record high for first time since 2018. Here’s one way to play the surge

Small caps joined in on the market rally in a big way.

The Russell 2000 rallied nearly 4% on Monday, hitting a record for the first time since August 2018.

Ari Wald, head of technical analysis at Oppenheimer, said the move is a positive for the entire market.

"This is a sign of broadening participation. It should not be overstated how bullish it is for the market. I think it argues for a continued recovery," Wald told CNBC's "Trading Nation" on Monday. "On a relative basis, we see small caps have been in decline since 2013. I think this is, how we count it, the longest stretch of small cap underperformance since the seven-year period 1983 to 1990 — seven years — so I think it's reasonable for small caps to play catch-up."

Wald believes the small-caps rally can continue. To take advantage of the move, he has pinpointed one corner of the group that looks primed to break out even further.

 "Small cap growth — it was first to break higher, first to turn versus the S&P 500. We still see more upside," said Wald.

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Michael Bapis, managing director of Vios Advisors at Rockefeller Capital, agrees that this is the beginning of a larger move for small caps.

"I think it can last. I mean, the high-flying tech names are moving away from people's portfolios and we're moving into value names, and wow, can you imagine? Value does matter now," Bapis said during the same "Trading Nation" segment. "It's going to begin with the small-cap sector and move to mid cap."

Bapis added that small caps could offer opportunity for investors looking for yield. The IWM Russell 2000 ETF, which tracks small caps, has an average 1.2% dividend yield.

"A lot of these companies that are trading at single-digit PEs yielding 2% to 4% even 5% dividends, and in this interest rate environment, you get a quality company with quality earnings and a small dividend yield," said Bapis.

The IWM ETF has risen 2% this year, trailing the 10% gain on the S&P 500. The ETF has rocketed 77% off its March low.


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