Santa Gave The Russell 2000 A Lump Of Coal

Do you really count last couple weeks of 2015 as a successful Santa Claus rally?

Depends on how you look at it (i.e. which market index or sector). But the Russell 2000 Santa Claus rally has done little thus far to re-energize small caps bulls.

The Russell 2000 has returned around 2.5% over the last two weeks in December as the markets head into the last trading day of the year.  30 day Implied Volatility via the CBOE Volatility Index – Russell 2000 (RVX) came in slightly, but there’s not a legitimate reason to get bullish. Even if we see a little rally on the last trading day of 2015, the Russell 2000 is leaving 2015 with a whimper and a mostly forgettable Russell 2000 Santa Claus rally.

The reality is that when a market starts from a beaten down level and musters a little strength to move higher, it’s hardly a successful rally of any sort. Since the little tumble lower in late August, the Russell 2000 has been trapped in a range from 1100 to 1200. The Auction Market guys would call this an area of value. The point is that the market has found a short term equilibrium and, until something changes, we can expect the equilibrium to persist for small caps.

The 2015 Russell 2000 Santa Claus rally was just a move from the bottom of the range into the lower third, which is hardly a reason to jump up and down. The market remains trapped below a sideways 50 day simple moving average and a declining 200 day simple moving average.

Are you feeling bullish yet? The chart below illustrates the areas of interest.

Russell 2000 Index – Was That The Santa Claus Rally?

If we ignore the slight decline in August, the last few months of 2015 have been great for options income traders. At some point that will change. Until it does, the value area on Russell is a great support and resistance area for selling premium.

The market has made several failed attempts to break out of the value area over the past few months. In a couple of those attempts, the failure has been followed by a fast move to the other side of the range. The longer the market stays trapped, the more energy it builds and we can expect a fast market once the breakout holds.  In the meantime, using the lower end of the range as a support area for positioning Butterfly trades has worked well. Regardless of how you’re trading the range, recognizing the area of opportunity and when it has the potential to change will keep you from getting run over when the Russell breaks out.

Which way will the market go?

Short of a move above the 1200 level, the evidence we see is pretty bearish. That being said, we just don’t know.  A failed move out of the value area is likely to be followed by a fast move to the other side. It’s possible that the recent bounce off the lower part of the range (aka the Russell 2000 Santa Claus rally that wasn’t) could fail and we’ll see the Russell below the bottom of the range in early 2016. Until then, trade the range.

Twitter: @ThetaTrend

Author holds positions in the Russell 2000 and IWM at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.