A Bullish Play on Small-Caps Could Already Be Brewing | ETF Trends

The Direxion Daily Small Cap Bull 3X Shares (TNA) is up over 40% the past month, highlighting what could be a small-cap rally brewing after a rough first half of 2022, particularly for small-caps.

Despite the recent move higher, the Russell 2000 is down about 13% for the year compared to the S&P 500, which has fallen about 12%. Small-caps can tend to feel the brunt of a market downturn, and in the first half of 2022, this was indeed the case as inflation fears racked the capital markets with heavy sell-offs.

Nonetheless, the latest hope is that inflation could finally be subsiding. July’s consumer price index (CPI) showed signs of cooling as the index rose 8.5% while economists surveyed by Dow Jones expected an increase of 8.7%.

“The deceleration in the Consumer Price Index for July is likely a big relief for the Federal Reserve, especially since the Fed insisted that inflation was transitory, which was incorrect… If we continue to see declining inflation prints, the Federal Reserve may start to slow the pace of monetary tightening,” said Nancy Davis, founder of Quadratic Capital Management, in a CNBC report.

As for the fund itself, TNA tracks the Russell 2000 Index and seeks daily investment results equal to 300% of the daily performance of the index. Leveraged funds can provide traders with strategic exposure to niche corners of the market like small-caps, but should only be utilized by seasoned market players.

Heading Back to Small-Caps

The reprieve in the sell-offs is allowing investors to return to certain corners of the market that saw heavy exits like technology. Likewise, the small-cap arena in general could be garnering interest again as investors look for value in these smaller companies.

“It’s a good point in time to take a deep breath and say: Are those companies ever going to come back?” VettaFi vice chair Tom Lydon said on Yahoo Finance Live. “Did I not have them? Did I sidestep them? As we look forward and maybe the prognosis for the markets and the economy, although it’s not as great as it used to be, is it somewhat stable? Is it a buying opportunity? Just by the flows that we’re seeing in areas like technology stocks, like small-cap stocks, advisors and individual investors have taken advantage of it.”

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