Thinking small: Why the Russell rally can continue

Trading the small cap rally

All of a sudden, it seems that investors are thinking small.

The small-cap Russell 2000 index has crushed the over the past month, rising 1.75 percent while the large-cap S&P is up less than 0.2 percent. And traders see both fundamental and technical reasons for the trend to continue.

"It's as simple as this: It's growth versus value," said David Seaburg, head of equity sales trading at Cowen. "If you look at growth [stocks], growth is up roughly 7 percent more than value this year. Why? It's because rates are going to go higher and people are sort of staying away from these dividend names."

In other words, stocks that pay high dividends and thus trade a bit like bonds are more vulnerable to expectations of rising rates than stocks that are prized for their growth potential. Since more of the Russell components are growth stocks and more S&P stocks are big dividend-payers, a shift in market preference toward growth helps the Russell in comparison.

"Have we pushed it a little too far here? That's a possibility, but I think I prefer growth names over value names," Seaburg said Monday on CNBC's "Trading Nation." "I think that trend does continue. I would rather put money into the Russell 2[,000], although I do think we see a little bit of a near-term pullback before you do jump in."

Technical analyst Todd Gordon provided an additional reason why the Russell may be outperforming: The rally in the U.S. dollar seems to have resumed. That's bad news for big multinational companies that have large exposure overseas.

Read More How to cash in on this year's big currency trend

A strong dollar environment "does favor those domestic companies like small caps," Gordon said.

Though he had previously been short the iShares ETF that tracks the Russell (IWM), Gordon now says he covered that position, and has "no problem flipping and going long. I think the trend is up."

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