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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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Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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