The rally in small-cap stocks is under pressure and could hit further resistance as the quarter ends, says a market research firm

• The Russell 2000 index fell below its 50-day moving average during Tuesday's selloff.
• The small-cap index had run the longest streak above that technical level in 10 years, says Bepoke Investment.
• Small-caps may face some pressure as trading in the first quarter wraps up.

The Russell 2000 index of small-cap companies has had a stellar run over the past year against large-cap stocks, but its stumble below a key technical threshold this week sets it up for some short-term underperformance, according to one market research group.

The Russell 2000 index on Wednesday was fighting to recoup some of its losses in the prior session. On Tuesday, it dropped by 3.6%, the worst decline since early March when slid by 2.8% in a single day. Tuesday's drop was part of a broader sell-off on Wall Street spurred in part by worries about global economic recovery as COVID-19 case counts climb in Europe.

The small-cap index has nearly doubled over the past year as investors buy into exposure to smaller companies that tend to benefit during times of economic growth. The pandemic dumped the US economy into recession during 2020 but it has since been in recovery mode with the aid of vaccinations and fiscal stimulus packages.

The Russell 2000's rise of 98% over the past 12 months has outstripped the S&P 500's gain of roughly 59%.

But Tuesday's nearly 4% fall left the small-caps index below its 50-day moving average for the first time since the end of October, according to a Wednesday note from Bespoke Investment Group. The index had logged 96 trading days above its 50-day moving average, the longest such streak since March 2011.

Tuesday's loss of that technical support suggests there may be more of a pullback to come, at least on a short-term basis.

"Given the wide performance gap, a number of investors have likely found themselves overweight in their allocation towards small caps which would necessitate the need for rebalancing, causing some downward pressure on small caps," wrote Paul Hickey, co-founder of Bespoke Investment Group, in the note.

Hickey said if prior history serves as a guide, the Russell 2000's underperformance may continue into the end of the first quarter. This quarter marks the 10th time the Russell 2000 was outperforming the S&P 500 by more than 10 percentage points on a quarter-to-date basis heading into the final week of the quarter.

"Of the prior nine occurrences, the Russell 2000's performance during the last week of the quarter was negative six out of nine times for an average decline of 1.67%," or a median decline of 1.52%.