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Traders Are Betting on a Small-Cap Rally

This article was originally published on ETFTrends.com.

Small-cap stocks and ETFs, such as the iShares Russell 2000 ETF (IWM) , were already retreating prior to last week's equity market slump, but those declines pressured smaller stocks in a big way.

IWM, which tracks the widely followed Russell 2000 Index, dropped more than 6% last week. Some data points indicate aggressive traders are wagering on a small-cap resurgence and they are comfortable doing so with leveraged exchange traded funds. That includes the Direxion Daily Small Cap Bull 3X ETF (TNA) .

TNA looks to deliver triple the daily returns of the Russell 2000 Index. Many traders believed smaller companies were insulated from the overseas turmoil. Furthermore, a stronger U.S. dollar and concerns over weaker global growth are also driving investors toward smaller company stocks that tend to earn most of their money from a still growing domestic economy.

TNA ETF Enthusiasm

Data support the notion that traders are betting small-cap stocks will soon resume their bullish ways. For the 30 days ended Oct. 11, TNA averaged daily inflows of $10.77 million, according to Direxion data. Conversely, traders took profits in TNA's bearish counterpart, the Direxion Daily Small Cap Bear 3X Shares (TZA) .

TZA attempts to deliver triple the daily inverse performance of the Russell 2000 Index. Over the past month, TZA is averaging daily outflows of $2.77 million, according to issuer data.

Third-quarter earnings season will soon test the veracity of the long TNA trade. From Oct. 22 through Nov. 2, approximately 56% of the Russell 2000's components report earnings.

Further supporting the small-cap outlook, the U.S. economy is still showing signs of growth with U.S. retail sales and consumer spending trends on the rise while the rest of the world is revealing weaker economic data.

There is a belief that when smaller stocks outperform large caps through the first three quarters of the year that money managers will sell small caps leading up to the fourth quarter, opting for “benchmark hugging” with larger stocks.

For more trends regarding Direxion ETFs, click here.