The iShares Russell 2000 Index (ETF) (IWM) Snoozefest Is Perking Up

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Small-cap stocks as represented by the iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) are higher by 2% for the year, and the year-to-date price action has largely taken place in a snoozy 5%-wide trading range. This group of stocks tends to see higher volatility than their large-cap cousins, but the slow grind thus far in 2017 is leaving traders with little opportunity … unless they apply one of two strategies that have worked this year.

The iShares Russell 2000 Index (ETF) (IWM) Snoozefest Is Perking UpThe S&P 500 — as represented by the popular SPDR S&P 500 ETF Trust (NYSEARCA:SPY) — is higher by more than 7% on the year and thus notably out-performing the small caps.

The skeptics will point out that this rally in the SPY ETF is largely due to a few heavyweight technology stocks, yet for investors who own this exchange-traded fund, this hardly matters much.

However, move higher in the S&P 500 this year has also come on extremely low volatility and that has been a source of pain to many traders who count on volatility to make money. In fact, the implied volatility of options on the S&P 500 — represented by the CBOE Volatility Index, aka the “Fear Index,” or VIX — traded below 10 in the first half of May and did so again briefly yesterday Wednesday, May 24, which is a rare occurrence.

IWM Charts

Looking at the multi-year picture of the IWM ETF, we see that it had a violently bullish reaction to the election results last November, but this multi-week phenomena quickly died out in early December. The index has been stuck in a boring sideways trot ever since, which I marked on the chart by the blue box.


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Bulls will point out that this consolidation phase is healthy as it is taking place above the blue breakout line near the $126-level. Bears on the other hand, state that such breakouts ultimately need to retest their previous breakout point, i.e., the $126-area, before heading higher again.

I can understand both sides of the argument and from a trading perspective, I am agnostic as to the next direction. As such, I’m focused on a breakout of the current trading range in either direction.


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Zooming in on the daily chart we see that the sideways move last December began just as the IWM ETF reached and marginally breached the upper-end of its up-trending range (purple-dotted lines). This sideways move, i.e., consolidation in time, has over the past few months, led the ETF back to the lower-end of the range.

One way that traders have made some money in the Russell 2000 thus far in 2017 is by playing the range, i.e., buying the lows around $133 and selling the highs around $140.

The other way traders made some money in the indices like the SPY ETF or the IWM ETF is by buying protection, i.e., puts if the implied volatility of the S&P 500 (VIX) dropped below 11. This worked like a charm two weeks ago and it will likely continue to work.

On Wednesday, May 24, the VIX once again marginally dropped below the 10-mark, which in my eyes through a multi-week lens, provides an opportunity to buy either protective puts in the IWM ETF or the SPY ETF. Alternatively, more sophisticated options traders could even consider buying straddles (i.e., buying calls and puts in equal amounts and same strike and expiration) in anticipation of implied volatility not staying below 11 or 10 for a prolonged period. This could be particularly interesting heading into the summer period, where a spike or two in volatility is almost always in the cards.

For directional investors on the other hand, more patience may be needed and a close above $140 in the IWM ETF would trigger a breakout higher toward $145, while a close below $132 may constitute a breakdown and thus a new leg lower toward $126ish.

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Article printed from InvestorPlace Media, https://investorplace.com/2017/05/ishares-russell-2000-index-etf-iwm-snoozefest-perking-up/.

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