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Risk On. To the Moon!

February 16, 2021

Small Caps, China and Biotech.

January was an interesting month for the market. Despite finishing 2020 at an all-time high, witnessing a strong start to earnings season, and seeing encouraging COVID-19 infection numbers in the U.S., the broad market ended the month slightly lower than it entered 2021.

While choosing a precise cause for any stock market activity is virtually impossible, it’s safe to hazard a guess that recent volatility may well be the result of a very recent, and yet contemporary phenomenon.

Over the first few trading weeks of the year, Wall Street found itself in an unfamiliar position (although one not entirely unique to the 21st century). For once, the big hedge funds and institutional traders found themselves pitted against a rag-tag group of Reddit users who, recognizing the disproportionate power those Wall Street players are generally able to wield against retail traders, were able to use the internet to turn the tables on the monied class that has thrived during a pandemic that has ruined so many others.

While the drama is ongoing and it’s hard to determine a moral to the story, the volatility of these recent developments has nonetheless changed the physics of a market that is still technically in the midst of a months-long bull run. The uncertainty has left major market leaders in the technology and financial sectors in a holding pattern to start February, in spite of strong quarterly reports and significant momentum through the final months of 2020.

As a result of these strange developments, several unexpected sectors are seeing a rise in trader interest and helping push a handful of Direxion’s leveraged funds higher.

Small Caps Play Big

One of the clearest signals that Wall Street is looking for growth outside of the blue chips is the strong response small caps have received through January, with the Russell 2000 Small Cap index maintaining roughly 8% percent growth compared to the essentially flat S&P 500.

Even before the start of the New Year, small caps were seeing renewed interest within the broader market rally that took hold through November and December. Over the past three months, the Direxion Daily Small Cap Bull 3X Shares (TNA), which aims to deliver 300% the daily performance of the Russell 2000® Index, has climbed roughly 150%, even hitting a new 52-week high through January.

Bloomberg. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. For standardized and month-end click here.

Small caps have been central to the eternal debate surrounding growth versus value. And while growth continues to evince strong evidence against value when looking at recent revenue figures from mega-caps like Amazon, Apple Inc. and Microsoft, traders may be drawn to the lower ratios among the small caps contingent when compared to the surging valuations shared among their high growth counterparts.

Add to this the potential exposure of high profile short interest stocks, in the vein of GameStop or AMC Entertainment, both of which are several-billion-dollar market cap targets, and it’s not difficult to imagine that the action among small caps is in some way related to Wall Street seeking both profit and safe harbor in the relative anonymity of the small-cap sector.

Chinese Stocks Surge

While U.S. small caps have benefited from the relative obscurity of small size, drafting on the bullishness of the broad market, international equity, particularly Chinese stocks, has only recently surged ahead. Earnings strength among the nation’s biggest technology and financial firms, like Alibaba, JD.com and Ping An Insurance, have been just as strong as their U.S. counterparts, the deciding factor in their recent outperformance may be chalked up to their relative value versus domestic stocks.

Both the Direxion Daily China 3x Bull Shares (YINN) and the Direxion Daily CSI China Internet Index Bull 2x Shares (CWEB) have seen a more than 25% jump through January as their target indexes outpace the S&P 500 by a wide margin.

Bloomberg. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. For standardized and month-end click here.

While the promise of emerging market equity has also been an alluring target for traders seeking a hedge against domestic equity, the Chinese economy is not blazing any new trails in terms of fundamental performance when compared against domestic metrics. Both the U.S. and Chinese economies experienced a slowdown through 2020 with the U.S. sustaining a roughly 3. 5% contraction through 2021 while China experienced a relative slowdown of just 2.3% growth through 2020, which is minuscule against the 10%-7% rate of growth the nation was posting through the past decade. At the same time, companies in both nations are seeing similarly strong recovery based on revenue numbers.

Indeed, there’s very little differentiating China from the U.S. in terms of growth potential, and both nations seem to have gained a foothold against the ongoing COVID-19 pandemic. China was among the most stringent in regard to containing the spread of the diseases in the first half of 2020, which helped them jumpstart their recovery earlier. But infection rates in the U.S. have also seen a marked decline since the start of the year, and continued vaccination initiatives as well as a more concerted approach to monitoring the virus from the recently-inaugurated Biden administration.

Biotech Benefits from COVID Treatment Outlook

Perhaps the most evident example of the severe disconnect between the market fundamentals and the search for growth may be in the strength exhibited among the domestic biotech and biopharma names.

The Direxion Daily S&P Biotech Bull 3x Shares (LABU) remains one of the top-performing ETFs of the previous few months, having surged more than 160% since November to hit a five year high above $140 a share.

Bloomberg. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. For standardized and month-end click here.

Biotech and pharma remain appealing themes for traders looking for momentum in a market that is seemingly at war with itself. Not only thanks to the relatively small size of many of the industries primary constituents, like Inovio Pharmaceuticals, Sorrento Therapeutics, Inc. and OPKO Health, but also thanks to the high growth potential represented by the continuing development of COVID-19 vaccines and testing kits from leaders like Moderna and Amgen Inc.

All told, market signals seem to be pointing toward growth opportunities even as traditional growth stocks struggle to find traction in an uncertain market environment. While domestic markets work through their current turmoil, traders with a more long-term outlook may well profit from looking to other areas of growth outside of more high-profile growth sectors.

Just 7 trading weeks into 2021, there’s only one thing that’s certain. Whether you’re a bull or a bear, Direxion is with you. Our leveraged ETFs are powerful tools built to help you:

  • Magnify your short-term perspective with daily 2X and 3X leverage
  • Go where there’s opportunity, with bull and bear funds for both sides of the trade; and
  • Stay agile – with liquidity to trade through rapidly changing markets

TNA Top 10 Holdings (as of 12/31/2021)

Penn National Gaming0.64
Caesars Entertainment0.54
Plug Power0.51
Sunrun0.42
Mirati Therapeutics Inc0.38
Darling Ingredients Inc0.37
Ultragenyx Pharma0.35
Deckers Outdoor0.32
Ii Vi0.31
Arrowhead Pharmaceuticals0.31

YINN Top 10 Holdings (as of 12/31/2021)

Meituan8.78
Tencent8.40
Alibaba Group7.88
JD.com5.77
Ping An5.43
Xiaomi4.61
China Construction Bank4.44
WUXI Biologics (Cayman)4.33
Industrial Commerce Bank4.07
Netease Inc3.78

LABU Top 10 Holdings (as of 12/31/2021)

Alexion Pharmaceuticals1.18
Agios Pharma1.17
Sage Therapeutics Inc1.14
Ionis Pharmaceuticals Inc1.12
Tg Therapeutics1.12
Kodiak Sciences Inc1.06
Bridgebio Pharma1.05
Apellis Pharmaceuticals1.04
Editas Medicine Shs1.03
Arena Pharmaceuticals1.01

Short-term performance, in particular, is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns. Because of ongoing market volatility, fund performance may be subject to substantial short-term changes. For additional information, see the fund’s prospectus.

An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at www.direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.

Market Disruptions Resulting from COVID-19:  The outbreak of COVID-19 has negatively affected the worldwide economy, individual countries, individual companies and the market in general. The future impact of COVID-19 is currently unknown, and it may exacerbate other risks that apply to the Fund.

CUSIP Identifiers have been provided by CUSIP Global Services, managed on behalf of the American Bankers Association by Standard and Poor’s Financial Services, LLC, and are not for use or dissemination in any manner that would serve as a substitute for a CUSIP service. The CUSIP Database, ©2011 American Bankers Association. “CUSIP” is a registered trademark of the American Bankers Association.

Shares of the Direxion Shares are bought and sold at market price (not NAV) and are not individually redeemed from a Fund. Market Price returns are based upon the midpoint of the bid/ask spread at 4:00 pm EST (when NAV is normally calculated) and do not represent the returns you would receive if you traded shares at other times. Brokerage commissions will reduce returns. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV. Some performance results reflect expense reimbursements or recoupments and fee waivers in effect during certain periods shown. Absent these reimbursements or recoupments and fee waivers, results would have been less favorable.

Direxion Shares Risks - An investment in the ETFs involves risk, including the possible loss of principal. The ETFs are non-diversified and include risks associated with concentration that results from an ETF’s investments in a particular industry or sector which can increase volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. The ETFs do not attempt to, and should not be expected to, provide returns which are a multiple of the return of their respective index for periods other than a single day. For other risks including leverage, correlation, daily compounding, market volatility and risks specific to an industry or sector, please read the prospectus.

Distributor for Direxion Shares: Foreside Fund Services, LLC.

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