Small caps have been hot recently and look set for another strong winter season. Generally, companies between $300M and $2B in market capitalisation are classified as small caps. Their progress can be tracked by the IWM ETF (iShares Russell 2000 ETF).

IWM ETF

The ETF has been consolidating since February without breaking out to new highs. Small caps have had strong momentum in recent weeks and look like they may help the index breakout above the all-time high of $234.53. A break above would help the momentum of individual stocks, with a few already seeing over 100% performance gains in the last weeks.

Chart provided by TradingView

Small caps

Some of these top performing stocks include Corvus Pharmaceuticals (CRVS), Helbiz (HLBZ) and Onion Global (OG). These have seen rises of 240%, 190% and 130% respectively. Other notable names that are just under the classification of a small cap (known as micro caps) but look set to join this group are DatChat (180%) and Camber Energy (450%). These are a few examples of the momentum small caps carry, seeing much greater returns than large caps. But the volatility can be a two edged sword. Stocks don’t just go up, so small caps can be risky. Turning your attention to small caps when they are very bullish can be a way to limit your risk. Trading them whilst the market is bearish can be very difficult if you are a long-biased trader only.

Last winter, the market saw only six stocks remain under the price of $1. To put that into perspective, as of this morning, there are 114 stocks that trade under this price. If winter looks set to be the same as last year, these stocks should be of interest for you.

What to look for

Catalyst are a good thing to look for alongside a good technical set up. These include mergers, clinical trials for pharmaceutical companies and sympathies. For example, Sphere 3D Corp (NASDAQ:ANY) jumped in price yesterday. They have a merger catalyst with a crypto mining company and speculation came out related to Elon Musk being on the board. The stock moved from $5.90 to an intra-day high of $7.50.

So, keep an eye on the news and finding companies that may benefit from it. Lots of stocks are cheap at the moment and a hot winter will see many make great returns. Small caps are not to be ignored during this strong seasonal cycle.

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