Micro-cap companies represent the smallest publicly traded companies in the financial markets, with market capitalizations typically ranging from $50 million to $300 million. Based on charts from holdings of niche exchange-traded products, it appears as though this group could be the one to watch over the remaining months of 2020. In this article, we will take a closer look at some specific examples to get an idea of how traders could approach the idea of buying into micro caps.

Key Takeaways

  • Analyzing top holdings of micro-cap exchange-traded funds (ETFs) can be a good method for finding companies that will soon be added to small-cap funds.
  • Nearby support levels on small-cap stocks like Sorrento Therapeutics, Inc. (SRNE) and Maxar Technologies Inc. (MAXR) make this group one to watch over the final months of 2020.

iShares Micro-Cap ETF (IWC)

While it may seem counter-intuitive at first, one interesting method for small-cap investors to use when it comes to finding trading candidates is to analyze charts niche micro-cap funds and their top holdings. Micro caps are companies that are commonly added to portfolios via exchange-traded products such as the iShares Micro Cap ETF (IWC). Looking at the chart below, you can see that the price has recently started to pull back toward the support of the 200-day moving average.

The bounce and subsequent crossover between the moving average convergence divergence (MACD) and its signal line are a clear indication that the bulls are in control of the momentum and that prices could be poised to move higher over the weeks to come. From a risk-management perspective, stop-loss orders will most likely be placed below $86.03 in case of a sudden shift in market fundamentals or sentiment. This ETF could be of specific interest to small-cap investors because the top holdings of the fund will likely be near-term additions to small-cap funds and could be poised to benefit from the pending levels increased attention.

Chart showing the share price performance of the iShares Micro-Cap ETF (IWC)
StockCharts.com

Sorrento Therapeutics, Inc. (SRNE)

One of the top holdings of the IWC ETF that could capture the attention of active traders over the weeks ahead is Sorrento Therapeutics. Looking at the chart below, you can see that a step-like pattern has formed and that the bulls are clearly in control of the momentum.

The strong move higher in recent months will likely force small-cap managers across North America to take a closer look and consider adding the stock to their portfolios, which could act as a catalyst to even further buying pressure. Most active traders will likely hold a bullish outlook on the stock until the price closes below one of the dotted trendlines or the 200-day moving average, depending on risk tolerance and investment horizon.

Chart showing the share price performance of Sorrento Therapeutics, Inc. (SRNE)
StockCharts.com

Maxar Technologies Inc. (MAXR)

Another top holding of the IWC ETF that could capture attention of small-cap traders is Maxar Technologies. Based on the chart below, you will see that the price has been in clear control of the bulls since the 50-day moving average crossed above the 200-day moving average in June.

The nearby support of the 50-day moving average and horizontal trendline will likely add to the conviction of the bulls because current levels offer a lucrative risk/reward setup. More specifically, traders will most likely look to enter as close to current levels as possible and then protect against a selloff by placing stop-losses below $22.50 or the $16.96, depending on outlook and risk tolerance.

Chart showing the share price performance of Maxar Technologies Inc. (MAXR)
StockCharts.com

Keep in mind that classifications such as large cap or small cap are approximations that change over time. As a general rule, small-cap companies offer investors more room for growth but also confer greater risk and volatility than large-cap companies.

The Bottom Line

Micro-cap ETFs are a good source of inspiration for small-cap investors looking for candidates to add to their portfolios. Top holdings are generally in such a position due to significant changes in underlying fundamentals, and increased exposure by larger-cap funds is often enough of a catalyst to send prices higher.

At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.