Oppenheimer analysts recommend investors to buy the Invesco Small-Cap Momentum ETF (NYSEARCA:XSMO).

This index “is one of the few small-cap benchmarks that broke above its 2021 peak in July and subsequently cleared this peak during the post-election breakout,” wrote Ari Wald, head of technical analysis at Oppenheimer, in a note.

The index has also reached a confirming new high compared to the Russell 2000 (IWM), and analysts highlight four buy-rated ides from the ETF:

• Archrock Inc. (AROC)
• AZZ Inc. (AZZ)
• Griffon Corp. (GFF)
• Palomar Holdings (PLMR)

Small caps (IWM) have reached their November 2021 peak, and their “ability to punch through this resistance will be telling for the overall market cycle,” Wald said.

The Russell 2000 (IWM) vs. S&P 500 (SP500) ratio has also moved above its 200-day average in favor of small-caps.

Analysts recommend select small-cap exposure as large caps will remain attractive as the bull cycle matures into its third year, they said.

In addition, the Russell 2000’s (IWM) three-year rate-of-change is advancing into positive territory after one of its poorest performing periods on record, which was only exceeded in 1990, 2003, 2009, and 2020.

“We think the low reading speaks to the lack of froth in the current market tape,” Walds wrote. Also, he said that this is “why we think a down cycle from current levels would more likely develop as a minor reset in an ongoing secular bull.”

With the Russell 2000 (IWM) being up 45% from its June 2022 low, “easier comps should push this momentum indicator toward the upper end of its range in H2’25.”

Over the last 90 years, there were 22 cycles alternating between small- and big-cap stocks. “While the durations for the cycles have been symmetrical, the payouts have been greater for small-caps in the major cycles,” Wald said – “the so-called small-cap premium.”

Today’s big-cap cycle started in 2021 and is part of a larger cycle favoring big-caps since 2013, he said.