Small Caps, Big Gains

What if you could wait until the market is halfway out of a dip and still buy it at the bottom? With this ETF, it’s not a fairy tale.

Buying the dip can be tough. Yes, acquiring a stock anywhere near the bottom will be profitable in the long run, but timing matters in the world of options. It’s no easy task to balance the FOMO (fear of missing out) of buying too late with the risk of buying too early.

But what if you could wait until the market is halfway out of a dip and still buy it at the bottom? It sounds like a fairytale, but it's possible to a degree. Allow me to introduce you to $TNA, the Direxion Small Cap ETF with 3x leverage.

Lags in fear, rips in greed

Historically, small caps have underperformed during market downturns, lagged behind in the early stages of a rebound, and then outperformed the market in the mid-to-late recovery phase.

This makes intuitive sense. When uncertainty and fear rise and the market begins to sell off, less-established small cap companies are often the first to go. When things start to settle down, capital flows into large caps first—they're stable, and they recover more reliably.

But once fear truly fades and the market decides it's time to put risk back on, small caps tend to take the elevator up while the rest of the market keeps trudging up the stairs.

Asymmetric upside

While uncertainty and fear aren't completely gone from this market, both are beginning to subside. While it's still unclear what will come of President Trump’s tariff plans, I personally believe we’ve seen the worst of it. He already rolled back his original plan to stop the crash, and I find it extremely unlikely that he would go back to that plan after seeing the consequences.

As such, I believe the market has already priced in the worst possible outcome from these tariffs, and $TNA is no exception. Even if the president springs new tariffs 45 days from now, I find it hard to believe we’d make lower lows. If the market has already priced in the harshest version of these policies, why would it make new lows on less severe news?

Obviously, nothing is guaranteed with this administration. But in my opinion, the upside here is highly asymmetric. We are very close to the bottom, with a 155% return needed to reach all-time highs once again, in an environment where I don't see much more room to the downside.

Nothing ventured, nothing gained

This ETF obviously comes with its fair share of risks. For starters, there’s inherent risk when trading any leveraged product. Leverage doesn’t just magnify direction—it also magnifies volatility. If small caps continue to jitter, so will $TNA.

Beyond the risk of leverage, this is also a position that might not move right away. Generally, complete certainty is required in the market before the trickle-down effect begins inflating these small cap names, and clearly we haven’t reached that point just yet.

However, I’m not trying to perfectly time the bounce on these small caps; the two trades I have made on TNA to this point expire on July 18 (93 DTE) and Oct. 17 (184 DTE). My sentiment here is simply that small caps always lag, and if we’ve truly found the bottom, then this ETF presents an opportunity to buy the very bottom of the dip while the rest of the market has already recouped half of it.

Lag is your friend

Unlike talking to a friend on FaceTime, watching a tastylive stream or playing video games, this is a situation where lag should be celebrated. If you, like me, believe peak (not all) uncertainty and fear is behind us, then $TNA might be worthy of your consideration.

It’s logical and expected that small caps are lagging behind the rest of the market as we recover. If stability holds, rotation into small caps is highly likely. If the next chapter of this story is risk-on, expect $TNA to be the victor by the time we close the book.

Gus Downing is host of the tastylive Network show Risk and Reward. @GainsByGus

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