Unprecedented And Rare Events

On October 24, we outlined a recent "never happened before" move in the Volatility Index or VIX. A recent article on Yahoo Finance covered another rare event seen in the stock market:

This market is well-known for doing the unprecedented. According to SentimentTrader, SPX traded more than 0.5% above its 5-dma for 10 days in a row in the past two weeks. In the prior 75 years, this has only happened twice before, both at bear market lows (1982 and 2002). In other words, a rare rip higher, that has only happened after multi-year bear markets, just occurred after a mild, four week drop. It's incredible and completely unexpected.

The jittery nature of the markets speaks to an increasing speculative bent created by the vast amount of printed money floating around the global financial system. All markets have speculative and fundamental components, meaning there is nothing alarming about speculation in general. However, higher speculative forces increase the need for risk management.

The Big Picture

Regular readers know our approach is to allocate based on known information, rather than attempting to forecast future events in a highly uncertain world. What is the hard evidence telling us now about the current rally attempt? The answer can be found in this week's stock market video.

Strongest In A Decade

The Fed is hoping the economy can take the baton now that the central bank's bond buying campaign is complete. Monday's economic data provided some encouraging news. From Bloomberg:

Manufacturing data today added to evidence that the world's largest economy can sustain a withdrawal in central-bank stimulus. The Institute for Supply Management's factory index increased to 59 in October, matching August as the highest since March 2011, after 56.6 the prior month, the Tempe, Arizona-based group's report showed today. Readings above 50 indicate expansion. A gauge of production was the strongest in a decade.

Investment Implications - The Weight Of The Evidence

Readings from our market model have allowed us to scale quickly back into equities (SPY) over the past two weeks. The stock market bulls would prefer to see the NASDAQ hold the "gap" that was created at last Friday's open. The stock market bears want to see the gap filled, which would occur if the NASDAQ dropped back to its October 30 high of 4575.

According to Politico, polling shows numerous competitive races around the country remain in the "toss up" category. Therefore, as always, flexibility will be required as the markets digest election results .