I don't think the theory exactly is "people see everything in small towns". (Or maybe it is, but that's not the way I took it, or the way I see it myself).
More specifically, it's that people in small towns have a better pulse on the things that they DO see, but not necessarily that they "see" anymore.
For example, if I went for a jog (or drive, whatever) around Mollie's neighborhood, someone might see me, might not. But if someone DID see me, they would be very likely to know that I wasn't a local/that my car wasn't local.
Whereas if I went for a jog around my apartment complex, again, someone might or might not see me, but if they did, 95% of the people would have no idea as to whether I lived here or not.