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Some Traders Like This Small-Cap Rally

ETF Professor

The Russell 2000 Index is snapping out of its fourth-quarter slump. After tumbling in the last three months of 2018, leading small-cap stocks into a bear market, the Russell 2000 is up 10.5 percent to start 2019.

In fact, the Russell 2000 is off to its best start to a year since 1987.

What Happened

Small caps' performance to start 2019 is a far cry from what the group did last year. In 2018, the Russell 2018 lost 11.1 percent, or more than double the loss of the S&P 500, on its way to its worst annual performance since 2008.

Predictably, the recent small-cap resurgence is meaningful for the Direxion Daily Small Cap Bull 3X Shares (NYSE: TNA) and the Direxion Daily Small Cap Bear 3X Shares (NYSE: TZA).

Why It's Important

The bullish TNA tries to deliver triple the daily returns of the Russell 2000 while the bearish TZA attempts to deliver triple the daily inverse returns of that index. Data indicate traders have recently been moving in and out of both leveraged small-cap exchange traded fund (ETFs) as smaller stocks have been soaring.

For the five days ended Thursday, Jan. 17, the bearish TZA saw inflows of $34.26 million, a total surpassed by just one other leveraged Direxion ETF during that period, according to issuer data. Conversely, the bullish TNA saw outflows of $40.76 million during that time frame, a figure exceeded by just two other Direxion ETFs.

The move to TNA could be a case of traders prepping for a near-term pullback in the Russell 2000, but they may have to wait a little longer after that index gained just over 1 percent last Friday. Waiting with any leveraged ETF is a potentially dangerous game, particularly when the fund tracks a volatile asset class like small-cap stocks.

What's Next

For short-term traders looking for catalysts that could move TNA and TZA, those catalysts are imminent. In each of the next two weeks, more than 10 percent of the Russell 2000's member firms report earnings. In the first two full weeks of February, that number jumps to nearly 25 percent.

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