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Leveraged Small Cap ETF Has 20% Upside

The trend has been steady and consistent since the middle of 2018 and only picked up steam once the bear market intensified.

But the chart shows that small-caps have begun outperforming large-caps again coming out of the March bear market low. The rally has especially picked up steam over the past week and a half.

Stocks dipped at the open on Thursday, March 14th in what looked like a continuation of the sharp correction in equities from earlier in the week. On the heels of reiterated Fed support, positive developments on the coronavirus vaccine front and optimism over the economy reopening, stocks staged a swift rebound.

And, for the first time in a while, small-caps led on the way up. Over the past seven trading days, small-caps gained 10%, but the 3x leveraged small-cap ETF, the Direxion Daily Small Cap Bull 3X Shares ETF (TNA), is up 30%.

But the rally looks like it might not be done yet.

As the economy continues to reopen and the Fed continues to pledge virtually unlimited support for the financial markets, risk sectors, including industrials, materials and energy, have been participating in the rebound. These sectors leading the way is important signal for an extension of the stock market rally.

While there's a disconnection between economic fundamentals and stock prices currently, the prospects of an economic recovery coupled with returning jobs keeps investors in a buying mood.

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Small-caps face an uncertain future given how we still don't know how long a shutdown could last. The government's support of business should help avoid the worst case scenario and I see equities continuing their rally at least for the short-term.

For small-cap ETFs, including the iShares Russell 2000 ETF (IWM), I see 6-7% upside still to be had. That would translate roughly into a gain of 20% as long as volatility doesn't pick up sharply.

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