Surging small caps are a ‘fortress America’ trade—‘bullish brio’ will take them higher, traders say

Some investors see the surging Russell 2000 index building on its momentum and closing out the year strong.

The small-cap index has climbed almost 12 percent in November, outperforming the large-cap S&P 500 by nearly 3-to-1.

"It's been a pretty nice little year this month for small caps," quipped Rich Ross, head of technical analysis at Evercore ISI. And at this point, the phrase he would use to refer to the group is "overbought, but not over."

The run higher "looks too good to be true," Ross acknowledged Tuesday on CNBC's "Trading Nation." After all, the Russell logged gains in 15-straight sessions before sliding a bit on Monday and Tuesday.

Yet Ross believes that "we'll see a consolidation, and that will ease these overbought positions," and that after a mild drop, the Russell will have plenty of room to run.

Looking back a bit, the technical analyst points out that after the Russell more or less sat still for two years from 2010 to 2012, it had a very strong period of performance from 2013 to 2014. Ross says the recent period of underperformance looks similar on the chart, producing the tantalizing possibility of another big rally.

"After three years of being unloved and doing nothing, we're now emerging in decisive fashion with a bullish brio here. That tells me the small caps will actually continue to go higher through next year," he said.

Finally, seasonal patterns are on the Russell's side. The index has risen 3 percent in the average December over the past 30 years, Ross found.

Sentiment surrounding Donald Trump's surprising presidential win explains the small-cap outperformance, said Dennis Davitt of Harvest Volatility Management.

After all, smaller companies get far less of their revenue from overseas than larger ones. This means that if the U.S. will outperform the rest of the world, and particularly if Trump follows through on his promises to tamp down on international trade, small caps could prove the place to be.

"The is the 'fortress America' trade," Davitt said on "Trading Nation."

Still, he, too, thinks that in the short-term, the Russell is "ready for a pause" following its huge rally.

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