A classic Trump trade is about to get its groove back

Small caps have had a slow start to the year, but one technician sees another chance for investors to get in on another small-cap rally.

The Russell 2000 small-cap index surged after November's presidential election to finish 2016 up almost 20 percent. While the index has stayed flat year to date, Oppenheimer technician Ari Wald believes that small-cap stocks will rally as they "[tend] to outperform in a rising market," but he recommends looking at the S&P 600 index instead.

According to Wald's charts, the Russell 2000 is "still below multiyear resistance" relative to the big-cap S&P 500 index while the S&P 600 has actually just come off of "a new cycle relative high." This suggests to Wald that the S&P 600 will not only rally, but that investors may want to look at the index instead of the Russell 2000 if they want to play small caps.

"There [are] some differences in the construction of these indexes," Wald said Tuesday on CNBC's "Trading Nation." "The S&P 600 index tends to have more higher-quality issues in it, and that's how we recommend playing the small-cap space."

But Boris Schlossberg, managing director of FX strategy at BK Asset Management, warns that there may be trouble coming for small caps. Some have suggested that protectionist policies such as those suggested by President Donald Trump would lead small caps to outperform their larger brethren. But Schlossberg doubts the U.S.-centric small caps would be safe from any coming trade storm.

"The problem is that if you engage in protectionist policies, it's very likely going to raise prices for the American consumer," Schlossberg said on "Trading Nation." "That's going to make small caps very vulnerable because the end users of their products are not necessarily going to have the income to buy their products."

So far, the S&P 600 index is relatively flat year to date, but has rallied more than 14 percent since November.


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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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