Haunted House or Not for October

We have another mixed bag this morning in the broad market, as "chop" seems to be on the tip of most traders' tongues, and rightly so. Beaten-down and prominent names like BA are bouncing a bit after having a rough week, while banks continue to slump and seem unable to sustain bounces. Momentum monsters like PENN are certainly not giving up without a big fight, even with a dilutive offering this week which initially jolted shares. 

With the month and third quarter winding down into the middle of next week, we could easily see (perceived) gamesmanship among portfolio managers to have and avoid certain stocks and sectors on their books. But the overall construction of the market is what matters most to me. 

And when we peek under the hood, the small cap issues housed in the Russell 2000 Index present two current points worth keeping in mind as we head into October and the home stretch fourth quarter for 2020.

First and foremost, the IWM (actively-traded ETF for the Russell) diverged for the S&P 500 and Nasdaq Composite indices insofar as not making it back to, and breaching, the pre-pandemic highs from February. Also note the Dow (marginally) did not make new highs either, and neither did the overlooked mid-caps in the MDY ETF. 

But considering how many growth managers often reside in the Russell, the glaring divergence to not even come close to the pre-pandemic highs is noteworthy (as seen by the downsloping light blue line on the IWM daily chart, below). 

Putting that bigger picture divergence to one side, however, the more actionable tidbit about this morning's action as we head into October next week is this: Observe the IWM kissing and testing its 200-day moving average as we speak. The 200-day is the yellow line on my chart. 

Should bulls fail at this spot, it would carry far more significance for me than the Election uncertainty, what PENN or ZM do on a given day, or too much else for that matter, since we would be talking about a major (roughly 2000 stocks!) part of the market which broke down below and failed to recapture its 200-day. Sooner or later, those divergences come home to roost in any type of market, even ones with the various absurdities the current one has enjoyed.