Small-cap equities can give traders amplified gains, but the same can be said when the markets move in the opposite direction the way they have been for the first half of 2022. However, when things eventually bounce, small-caps could come back in a big way.
Inflation fears and recession risks have certainly done a number on equities, especially small-caps. Unlike their large-cap peers, small-caps can feel the brunt of a market downturn, and that’s certainly been the case thus far.
Think about a life raft versus a cruise liner — the latter is akin to large-caps that can better absorb the impact of a large wave. As such, small-cap performance has taken a dive, and wary traders don’t want to catch the proverbial falling knife when it comes to trading small-cap stocks.
“Compared to their large-cap peers, the small cap sector of the equity market has underperformed notably over the past few months,” said Direxion Investments. “From an even longer-term perspective, the entire small cap sector hasn’t been this inexpensive compared to large caps in about 20-years.”
Rallying Points Are Lining Up
However, the stage could be set for a small-cap rally, according to Direxion Investments. Since the majority of small-caps are located domestically, the macroeconomic environment could be changing in their favor.
“Many small cap stocks are domestically-oriented,” Direxion said. “That is, most of their business is focused within the United States. On the other hand, large cap stocks are typically multi-national entities with business affairs across the globe.”
“The macroeconomic environment has recently evolved in such a manner that could start to favor small cap stocks,” Direxion added. “Historically, a stronger U.S. Dollar led to outperformance by small caps. However, this hasn’t been the case in the last year, but that could be on the cusp of changing, especially if recession fears retreat and inflationary pressures are quelled.”
Traders who want to play a small-cap bounce can amplify their gains even further using the Direxion Daily Small Cap Bull 3X Shares (TNA).
As for TNA, it tracks the Russell 2000 Index and seeks daily investment results equal to 300% of the daily performance of the index. With the extra leverage in place, the ETF is actually up about four times the index in its year-to-date performance.
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