Barclays global equity strategist team recommends that investors sell the recent rally in small-cap equities with the use of options as the company does not believe that there is much more room to run.
In an investor note put out on Tuesday morning, the financial institution stated: “We are skeptical about the recent small-cap rally given rich valuations, cyclicality, and high exposure to negative operating leverage.”
Barclays added that market participants should: “Fade the recent small-cap rally with options.”
Barclays analysts outlined that small-cap company returns have pointedly outperformed large-cap names over the last year or so. More importantly, Barclays believes that there is not much room left for small-caps to push higher.
The firm recommended: “To protect for a near-term correction, buy the (NYSEARCA:IWM) Mar 23. 185 put. Should equities revisit the Oct. 22 lows at expiry, the payoff ratio would be 4.4-to-1.”
Aside from options, small cap exchange traded funds may also find themselves in the mix of being overextended. See a list of popular small-cap equity ETFs: (NYSEARCA:VBR), (NYSEARCA:SCHA), (NYSEARCA:VBK), (IWO), (FNDA), (AVUV), (DFAS), (VIOO), and (SLY).
In broader financial news, stock index futures pointed to a lower open on Tuesday, but action will likely be volatile as more earnings roll in.