One week into the new year, small caps have overtaken large caps, fueling gains for the Direxion Daily Small Cap Bull 2X ETF (NYSEArca: SMLL) and the Direxion Daily Small Cap Bull 3X ETF (NYSEArca: TNA).
As evidenced by the Russell 2000 and the S&P 500, both indexes have started to move past their 200-day moving averages in the last couple of trading sessions, but it’s been the Russell 2000 that’s been outpacing the S&P thus far.
Small caps led the way on Monday as the Dow Jones Industrial Average gained over 200 points, while SMLL rose 3 percent and TNA rose 6 percent. The Russell 2000 gained 1.88 percent on Monday while the S&P 500 rose 1.3 percent on renewed trade negotiations between the U.S. and China.
After the recent upheavals in the markets as a result of volatility, the major indexes have rallied with the Dow surpassing 700 points last Friday.
“We have a respectable probability that Friday’s rally and the last week-and-a-half’s rally has more legs behind it,” said David Sowerby, managing director and portfolio manager at Ancora Advisors in Cleveland. “It’s Fed policy right now, that’s first and foremost the most important gauge impacting the market today. Trade issues, number two. A very distant number three is the government shutdown.”
The rally was further spurred by strong labor market data and a more accommodative Federal Reserve with respect to interest rate policy. Federal Reserve Chairman Jerome Powell saying that the central bank will exercise more patience with respect to raising interest rates.
The Federal didn’t show much dynamism in 2018 with respect to monetary policy, obstinately sticking with a rate-hiking measure with four increases in the federal funds rate. That appears to have changed given the current economic landscape, and especially in the capital markets as Powell is now preaching patience and adaptability.
“As always, there is no preset path for policy,” Powell said. “And particularly with muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves.”
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