12-23-14 2:42 PM EST | Email Article

By Philip van Doorn, MarketWatch

The Russell 2000 has underperformed this year, but recent trading shows strength heading into January

The small-cap Russell 2000 Index. as you can see on the chart above, has trailed the S&P 500 Index (SPX) of the biggest U.S. companies this year. But that may be about to change.

In August, Art Nunes, chief investment officer for Dynamic Investing Group, an affiliate of Northwest Asset Management, said small-cap stocks were mired in a weak trend, as the Russell 2000 had sunk below its 200-, 50- and 20-day moving averages. The S&P 500, meanwhile, was on its way to hitting record highs — and it has done so again this week.

The market action in the Russell 2000 small-cap index has been very good as of late and reversed the bear market in these stocks back to a bull market, Nunes said on Tuesday.

Small-cap stocks have recovered from their October doldrums, and the Russell 2000 broke above its 200-day moving average last week. The trend may continue because of the upward paths for the 50- and 20-day moving averages:

The iShares Russell Top 200 Growth ETF (IWY) is a good way to tap into small-caps. Of course, it would have been lovely to have gone in at the bottom on Oct. 15, but Nunes said during a phone interview on Tuesday that it would have been very risky to buy in at that level.

The chart for the S&P 500 also looks healthy, trading well above the 50- and 20-day moving averages, and with those averages well above the 200-day:

Overall, the U.S. stock market looks really good across the board, and now even the small-caps, which underperformed during the first three quarters of the year, are outperforming the large-caps, Nunes said.

For particular industries, Nunes favors utilities and real estate investment trusts. One strong sector he is concerned about is biotech, which has kind of stalled out since the beginning of December, he said.

-Philip van Doorn; 415-439-6400; AskNewswires@dowjones.com

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12-23-14 1442ET