Large Caps Still Ahead as Inflation Data Looms

In the past three months, large-caps have been ahead. The Direxion Daily S&P 500 Bull 3X Shares ETF (SPXL) pulled past the Direxion Daily Mid Cap Bull 3X Shares (MIDU) and the Direxion Daily Small Cap Bull 3X Shares (TNA). Forthcoming inflation data, if it shows signs of cooling, could push all three funds higher.

There were already signs the economy could be cooling off as the month of April revealed slower job growth. The optimism helped to fuel an early May rally after the major stock market indexes took a breather to end the month of April. The three-month chart below corroborates with this drop after the three funds dipped, before subsequently picking up again in May.

“A cooler pace of hiring to a more sustainable pace should be interpreted as beneficial with respect to the inflation outlook going forward and remove any lingering concerns of a wage price spiral and put to bed loose and undisciplined talk from the corners of the trading community about stagflation,” said Joe Brusuelas, chief economist at RSM, in a Reuters report.

All aforementioned ETFs provide traders with triple leverage to maximize profits. TNA might be in last place among the three now, but when markets start experiencing upside, small-cap stocks can make pronounced moves, and the position of all three ETFs could look different by year’s end.

MIDU Chart

MIDU data by YCharts

Cuts Not Completely Out of the Picture

Right now, the CME FedWatch Tool is showing rates will remain unchanged at the next Fed meeting in June. With the higher-for-longer interest rates narrative prevailing as inflation remains elevated, the markets are scaling back on rate cut bets, but some market experts stand firm on their predictions.

“We’re sticking with our call for a first ease in July,” said Michael Feroli, chief U.S. economist at JPMorgan. “The market is not there, but we believe that if the next two job reports show continued cooling in labor market activity, then the Fed will be comfortable taking back some of its policy restraint.”

Rate cuts, should they happen by midsummer, should benefit all three ETFs. It should make for an interesting summer for the markets and even more interesting fall as the presidential election draws closer.

Either way, the volatility should open opportunities in leveraged ETFs. With inverse funds as part of their product suite, traders can profit from both sides of the market whether there’s upside or downside.

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