Time To Buy Small Caps? [Direxion Daily Small Cap Bear 3X Shares, Direxion Small Cap Bull 3X Shares (ETF)]

buyers and sellersTyler Laundon: We all want to buy stocks at an all-time low and sell at an all-time high. But that rarely, if ever, happens. And with the S&P 500 closing at a record high on Monday it is sure not happening with many stocks right now.

But you don’t have to buy stocks at all time highs if you look beyond large caps. For long-term investors, small caps might make a lot of sense, especially now.

Based purely on technical indicators, small caps look like a better buy than large caps at the moment. As the chart below shows, small caps recently touched their 200-day moving average (DMA) for the first time since late 2013.

The last two times this happened small cap stocks went on to rally in the months afterward.

small-caps

Small caps aren’t a sure bet of course, but the 200 DMA does imply that a significant move is in the near future. Let’s look at the bear case.

The recent move down to the 200 DMA has certainly brought out a fair share of small cap bears. One of the arguments against small caps is valuations – the S&P 600 Small Cap’s forward PE of 17.7 is near the high end of its 10-year range, even after coming down a bit over the past month.

To be perfectly frank, I’d rather see a forward PE in the range of 14 to 16 for small caps before I’d be aggressively buying. But for long-term investors committed to small caps over the long-haul, right now still appears a good time to add a little exposure.

If we broaden our view to a 10-year time frame, as in the chart below, you can see how the 200 DMA has served as a good entry point on numerous occasions. The exception is when there is a major negative economic event or high likelihood of a recession looming. But this time isn’t one of those situations.

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