It’s not just you.
The stock market spiking to new all-time highs after a hard correction at the outset of the Iran hostilities is, well, rare.
So unusual, in fact, it’s a “12-sigma event” — meaning it’s literally off the charts:
The market’s extreme move higher even outdoes the final dotcom blow-off top on March 10, 2000. The Nasdaq then fell 78% from its peak, bottoming out at 1,114 by October 9, 2002 (Source: Ned Davis Research)
In forecasting for the economy or stock market prices, “sigma” is a mathematical shorthand for “standard deviation.” It describes the level of uncertainty or “spread” around a central predicted value.
A “12-sigma event” is an occurrence so statistically rare that, under a standard normal distribution, it is effectively impossible within the lifespan of the universe.
Markets have gone from a typical “dead cat bounce” to a surge that defies the common experience of everyday investors. This rally is remarkable because it’s positive.
Historically, most atypical moves on Wall Street are painful and get a lot of headline attention:
- Black Monday (October 19, 1987): The Dow Jones fell 22.6% in a single day. While models vary based on the timeframe of data used, this is frequently cited as a 20-sigma to 25-sigma event.
- The 2008 Financial Crisis (October 13, 2008): The S&P 500 surged 11.6%, which was recorded as an 11.82-sigma positive event—nearly reaching the 12-sigma mark.
- Beyond Wall Street, even more extreme sigmas have been seen. For instance, the British Pound dropped in 15 sigma in 2020 after the Brexit vote. The Swiss Franc saw a staggering 180-sigma jump in 2015 after the Swiss National Bank removed the franc from a 1.20 peg to the euro.
The current rally on the S&P 500 Index is just the kind of rare event Grey Swan exists to identify! For an interesting way to play it, see your Shadow Stocks report in the P.S. below.
~ Addison
P.S. Yesterday on Grey Swan Live!, we showcased our latest research on Shadow Stocks – volatile stocks that move rapidly up and down beneath the surface of the calm indexes.
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