Proposed Stricter Nasdaq Delisting Process Could Put Spotlight On Direxion Small Cap Bull And Bear 3X ETFs

Nasdaq NDAQ made waves Thursday when it proposed tighter delisting processes for companies that fall out of compliance with listing standards. Targeting so-called penny stocks, the new standard may lead to struggling entities getting the boot by the stock exchange operator.

According to Reuters, Nasdaq requires companies listed on its exchanges to maintain a minimum bid price above $1. Failure to meet this standard for 30 consecutive sessions is deemed to be non-compliant and companies are given 180 days to rectify the matter. If compliance cannot be achieved within this window, affected enterprises can request a second 180-day extension.

If the company remains non-compliant, it has the option to appeal to Nasdaq's hearings panel. This action has the impact of effectively delaying the delisting process. However, under the proposed rule changes, publicly traded firms that saw their share price dip below $1 on the completion of 360 market sessions, will be suspended.

Also, entities with share prices that drop beneath $1 that also effected a reverse stock split within the one-year period will be subject to an immediate delisting determination. By raising listing standards, the overall quality of small-capitalization companies may benefit as only the most viable businesses are spotlighted, thus positively affecting the Russell 2000 index.

On another note, lesser-known enterprises have been on the receiving end of bullish sentiment. Last month, small-cap stocks saw a significant boost in value, which may be attributed to a rotation away from large caps, particularly from Big Tech. In its place, promising small-cap stocks are standing out.

The ETFs: For investors seeking high-risk, high-reward opportunities within this potential rotation, Direxion offers two leveraged exchange-traded funds. First, Direxion Daily Small Cap Bull 3X Shares TNA seeks the daily investment results of 300% of the performance of the Russell 2000. Second, for those who may be bearish, Direxion Daily Small Cap Bear 3X Shares TZA offers 300% of the inverse of the aforementioned index's performance.

To be clear, these ETFs represent opportunities for traders who are speculating on the market for a period lasting no longer than a single day. Due to the daily compounding of leverage combined with the higher-than-average volatility of small caps, leveraged ETFs — especially 3X funds — may exhibit value decay if held over time.

The TNA Chart: TNA saw wild fluctuations recently, with the leveraged fund hitting a closing high of $49.09 within the trailing month. Currently, the ETF is exchanging hands just north of $37.

• Earlier this week, TNA dropped below its 200-day moving average. However, the subsequent price action pushed the ETF above this critical gauge of intermediate-term market health.
• The immediate target for TNA bulls would be to decisively secure the $38 support line. From there, a push toward the psychologically significant $40 level represents the next logical objective.

The TZA Chart: TZA has likewise witnessed severe undulations. In this case, the inverse leveraged fund within the trailing month dropped to a closing low of $13.51. At the moment, TZA has recovered to just under the $17 level.

• Last month, TZA fell conspicuously below its 50 DMA and its 20-day exponential moving average. While it has cleared the latter average, the inverse ETF is still struggling to get above the former.
• The next logical target for TZA bulls (i.e. small-cap bears) is to secure the $18 support line. From there, pushing toward the psychologically significant $20 level appears to be the main objective.

Featured image by Mohamed Hassan from Pixabay