The S&P 500 is up about 15% for the year, taking a lead on the Russell 2000 index, which is up about 6%. However, there could be relative bargains in the small-cap index, allowing investors to capitalize on companies with future upside.
Last year’s bear market may have kept investors away from small caps more often than their larger-cap counterparts. Even in 2023, much of the market rally is being led by big tech companies. The upshot, though is that small companies now are a relative bargain versus large-cap companies.
“That broader pessimism among investors has made small caps unusually cheap,” a Direxion blog post noted. “In fact, analysts have noted that many small caps are trading at discounts of 30% to 40% when you consider the relative strength of their sales and earnings performance over the past few quarters.”
Historically, small caps will ride the wave of an equities rally. Even if that doesn’t happen, the positive remains that bargains are abundant in the small cap space.
“Even if this is not the precipice of another decades-long outperformance from the small-cap segment, traders are still likely to find no shortage of potential opportunities among such steeply discounted stocks,” the blog added.
Trading the Small Cap Space
As more investors turn the risk dial up when the threat of rising interest rates and a recession dissipate, this could propel small cap equities higher. For short-term traders, this future upside can allow them to play the Direxion Daily Small Cap Bull 3X Shares (TNA).
In the current market environment, inflation is still a thorn in the side of capital markets, giving large caps the advantage given their stability versus small caps. That’s especially the case if a recession were to hit the economy thanks to too much monetary policy tightening by the Federal Reserve, but some analysts think small caps are well positioned in the current market.
However, as recession fears fall to the wayside, small caps are primed for growth in the long-term horizon. For the investor looking at the forest through the trees, small-cap exposure can benefit a portfolio in the long run. Short-term traders can also seize the opportunity with short-term moves to the upside as small caps make a comeback.
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