A Santa Claus rally can benefit all market capitalization sizes, including small-caps. The Russell 2000 index is already up more than 20% for the year. It could end on a positive note.
High interest rates have been a thorn in the side of small-caps the last few years thanks to high interest rates. With high rates come high borrowing costs, which is where a majority of small caps can falter. Many of these companies use financing to fund their operations. Therefore, high debt service costs can eat into potential revenues and profit generation.
“Small caps don’t like higher rates because many of [them are] money-losing stocks, which means they have to be able to borrow money to stay afloat,” said Steve Sosnick, chief strategist at Interactive Brokers, during an episode of Yahoo Finance’s Stocks in Translation. “They prefer lower rates.”
However, with the Fed easing monetary policy and the potential for a year-end rally, small-caps could continue rallying toward the upside. Small-cap stocks have been rallying the past six months, gaining 19%.
“Seasonally speaking, small caps are set up for their annual year-end rally into [the first quarter],” wrote Jeff Hirsch, editor in chief of the Stock Trader’s Almanac.
Rather than build a small-cap portfolio of stocks to trade, another option is to trade the Russell 2000 index. For those seeking leverage to maximize their profit potential, another option is the Direxion Daily Small Cap Bull 3X Shares (TNA ), which offers triple the exposure to the index. The fund provides 300% exposure to the index, allowing traders to maximize their profits if small-cap equities continue to show more upside through the rest of the year.
Small-Cap Trading Flexibility
On the opposite end of the spectrum, if small-caps falter in the interim, traders can use the Direxion Daily Small Cap Bear 3X Shares (TZA ). It takes the opposite direction of TNA to give traders more flexibility and tactical exposure to the Russell 2000 regardless of whether it heads up, or in the case of this particular fund, when it heads down.
Equities of all market cap sizes can always exhibit volatility, so having the ability to trade both bullishness and bearishness will allow traders the ability to profit in any market. This is especially the case with small-caps, which can be subjected to amplified moves in the market.
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