A Wall Street strategy chief says the market is flashing bullish signals as more stocks start to rally

• Miller Tabak's chief market strategist told CNBC on Friday the stock market is signaling it has upside potential before Election Day.
• Matt Maley cited the outperformance of the Russell 2000 index and said small-cap stocks and chip stocks have room to grow.
• He's less optimistic about the market in the long term, however. A second wave of the coronavirus and an expensive market could be bearish after the election, he said.

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Matt Maley of Miller Tabak told CNBC on Friday that the stock market is signaling it has upside potential before Election Day.

The chief market strategist said he is watching the recent outperformance of small-cap stocks. As of Thursday, the Russell 2000 small-cap index was up almost 6% week-to-date, compared to a roughly 3% gain in the S&P 500. The broadening out of the stock market rally, which was previously dominated by mega-cap tech names, is bullish, he said.

Chip stocks have also been a leading indicator for the market recently, he said. If they rally further, it will be bullish for the market at least until Election Day, the added.

Institutional investor strategy based on the time of year could also push the market higher, he said.

"We're in the fourth quarter of the year — institutional investors, if the market keeps rallying, no matter what they think of the long-term value of the marketplace, they have to be in the market and that could push things higher," Maley said.

He added that small-cap stocks and chip stocks are enticing right now. Investors can begin to rotate some of their holdings in large technology stocks, which may be a slightly overbought, into chip stocks and cloud computing stocks. "We have a long way to go" in those smaller technology names, Maley said.

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He's less bullish about the long-term trajectory of the market, however. While many investors have been suggesting that the market will boom after November 3 regardless of who the president is, Maley said he's a bit more cautious.

A second wave of the coronavirus could be more virulent after the election, he said. "But that doesn't mean we can't rally between now and then, especially because momentum is such a key player in the market place right now."

Maley added: "I'm cautious longer term because of the expensive market, but near term it definitely has some upside potential."