With Recession Fears Looming, Small-Cap Bears Could Stay Ahead of Bulls

Small-caps have been feeling the brunt of the downward pressure on stocks, even more so than their large-cap peers, as usual. With recession fears constantly looming, this could keep the bears ahead of the bulls, unless a year-end recovery comes.

When markets rally, small-caps can offer traders amplified gains in a recovery. Of course, the same can be said in reverse when a downturn ensues, forcing investors to see the safety of large-caps.

“Investors usually prefer the safety of blue-chip names over small-company stocks during economic downturns,” a Barron’s article said. “Small-caps have historically performed worse than large-caps when the U.S. has entered a recession.”

The U.S. Federal Reserve’s rate hiking is causing investors to fear that a forced recession could be ahead in order to springboard the economy back to life. That said, this is where a potential small-cap rally could occur.

“There are good reasons to suspect that pattern might not hold—despite recessionary concerns from rising interest rates and inflation,” the article added further. “Small-caps could now prove more resilient than blue chips, while still providing more upside during an economic recovery.”

2 Trades to Play the Move

The near-term move might be to stick with bearishness and the Direxion Daily Small Cap Bear 3X Shares (TZA), which is up over 60%. TZA seeks daily investment results equal to 300% of the inverse (or opposite) of the daily performance of the Russell 2000® Index.

Should a recovery occur, however, traders can take the opposite side with bullishness and the Direxion Daily Small Cap Bull 3X Shares (TNA). Going the opposite direction of TZA, TNA seeks daily investment results, before fees and expenses, of 300% of the daily performance of the Russell 2000® Index.TZA Chart

Direxion’s leveraged ETFs give traders:

  • Magnification of short-term perspective with daily 3X leverage.
  • Opportunity, with bull and bear funds for both sides of the trade.
  • Agility and liquidity to trade through rapidly changing markets.


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