Should Small-Cap Stocks Be On Your List To Buy This Quarter?

Who said that mom and pop investors couldn't influence the stock market today? It has long been considered the "dumb money" bet made by "less educated" investors. The "smart money," according to old hat thinking, came from hedge funds and institutional investors. But as I'm sure many of you have already seen, that isn't necessarily the case anymore. This seemingly came to a head earlier in 2021 with the initial short-squeeze in stocks like GameStop (GME), Express (EXPR), Koss Corporation (KOSS), and many others. 

Social media outlets, including Reddit and Twitter, were the supposed sources of the groundswell that ensued. Shares of these former penny stocks ended up exploding to record levels. "GameStonk" alone rallied by more than 2,440% from the beginning of January to its 2021 high of $483. While all of these Reddit stocks have come back down to earth, the vast majority continue trading much higher than they began the year. What's more, subreddit traders from places like r/WallStreetBets, r/RedditPennyStocks, and r/PennyStocks have continued focusing on lesser-known names. 

This week, shares of MicroVision (MVIS) soared to new highs. Believe it or not, this time last year, the lidar tech stock was considered a penny stock. On April 27, 2020, shares were trading around a quarter. One year to the day later, we see small-cap stock trading 11,100% higher. The originally bullish outlook on the stock came after rumors surfaced wherein MicroVision was seeking out strategic alternatives. The company had retained Craig-Hallum to help in this process. This was when the rumor mill began throwing around names like Microsoft (MSFT) and others as potential companies that might have an interest in MicroVision. While nothing like that would come to fruition, it did open up retail traders to the stock. Fast-forward to this month, and Redditors sank their teeth into the former penny stock. The mix of EV speculation based on Lidar and general sentiment surrounding small-cap stocks has helped trigger a strong move in the market. 

Are Small-Cap Stocks Over-Hyped Right Now?

I think a lot of the attention on small-cap stocks has recently gained momentum from the growing interest in higher-risk assets like cryptocurrency. Everything from Bitcoin and Ethereum to meme coins like Dogecoin and SafeMoon are experiencing speculation-fueled breakouts this year. Why would cryptocurrencies spark momentum for stocks? Now I am only suggesting the relationship here based on the pool of traders we're talking about. Retail/mom & pops are usually more open to taking on risk, especially when certain markets are hot. Furthermore, the growing use of platforms like Robinhood and Webull has also opened up an opportunity for your average trader to gain exposure to cryptocurrency and stocks on the same platform. 

When stocks cooled, we saw an almost immediate rotation into cryptocurrency from traders. Similarly, when Dogecoin, Bitcoin, and other cryptocurrencies dropped with capital gains tax news, the "reset" saw stocks moving first. Obviously, the bullish sentiment in the stock market today also has cryptocurrencies back in focus. All the same, this is now a factor to consider. With the IPO of companies like Coinbase (COIN), this once-fringe area of the market has become much more prevalent, especially with more mainstream figureheads like Tesla (TSLA) CEO Elon Musk and Mark Cuban getting behind the trend. 

Something For Everyone?

Whether you're trading cryptocurrency or stocks, the goal is the same: making money and repeating the process. With the rise of social media helping fuel demand in the stock market, we've got millions of new traders flooding into stocks and crypto right now. Whether they're experienced or not is secondary to what it has resulted in, hundreds of millions of dollars coming into the public markets. We've even seen new ETFs pop up that focus on this emerging trend. Take the VanEck Vectors Social Sentiment ETF (BUZZ), for example. According to its documentation, the ETF "seeks to track, as closely as possible, before fees and expenses, the price and yield performance of the BUZZ NextGen AI US Sentiment Leaders Index (BUZZTR), which is intended to track the performance of the 75 large-cap U.S. stocks which exhibit the highest degree of positive investor sentiment and bullish perception based on content aggregated from online sources including social media, news articles, blog posts, and other alternative datasets."

Yes, this is an ETF tracking stocks with higher degrees of social sentiment. Aside from GameStop and Tesla, Apple (AAPL), Amazon (AMZN), Palantir (PLTR), Advanced Micro Devices (AMD), Rocket (RKT), Viacom (VIAC), Novavax (NVAX), and Draftkings (DKNG) round out the top 10 stocks in the BUZZ ETF.

Things like this have forced the hand of the "smart money" in some ways. With the flood of new retail traders, it's tough to fight such massively bullish trends. This is where we see major firms like Melvin Capital and Archegos Capital coming under fire thanks to considerable margin calls, essentially getting caught red-handed with higher than normal leveraged positions that it couldn't service. If anything comes out of 2021, it is sure to be the rise of the retail trader. The big question now is can this rise lead to a sustainable path forward, or will it be one of the flashes in the pan for stock market history?