Santa Claus Rally Stalls: Russell 2000 Lags Amid Illiquid Trading
The Santa Claus rally stalled as thin holiday trading sparked profit-taking. Small caps lagged, breadth weakened and investors turned defensive heading into year-end.
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The market suffered a "sell the news" reaction to the traditional start of the Santa Claus rally on Friday. The indices had run up four days in a row ahead of the Christmas holiday, and that was an invitation to some selling in the very thin Friday session. It didn’t help matters that the holiday fell with just one day of trading before the weekend started. That caused very limited participation and ensured illiquid and random trading.
The senior indices were closed to flat, but the Russell 2000 small-cap index (IWM) underperformed with a loss of about 0.45%. When small-caps lag, that usually results in weak breadth. On Friday, just 40% of stocks advanced, and there was only a handful of names that attracted speculative interest and gained more than 10%.
Volume should pick up a little on Monday, but it will continue to be very thin trading, and the mediocre action on Friday may push investors to be a bit more aggressive in taking some profits if they don’t see signs of some Santa Claus rally action.
This action has little to do with fundamentals or technical conditions. It is just positioning, tax moves and some short-term speculation by folks that mistakenly believe that a Santa Claus rally is a sure thing.
My goal is to close the year with accounts as close to their highs as possible. I’m not expecting many great trading opportunities next week, so that means I’ll be more focused on defense.
Enjoy the weekend, and I’ll see you on Monday.
At the time of publication, DePorre had no positions in any securities mentioned.
