While our title may seem like a bold statement given what we've witnessed this year, we must remember the Flash Crash, European Disunion, and EU Emergency Bailout were reactive occurrences. With midterm elections, the unveiling of QE2, and an employment report on tap, investors find themselves in an unfamiliar position of proactive preparedness.

Let's take each of these items on their face; compartmentalization in a sensory overload environment helps alleviate the overwhelming anxiety many of us may feel. While this exercise is by no means exhaustive, it will perhaps lend perspective to each catalyst and by extension, help us navigate the collective comeuppance that will soon arrive.

Midterm Elections

Akami Technologies (AKAM) estimates that Internet viewers tomorrow may rival records set during the World Cup, according to Bloomberg. The stakes are enormous -- voters will decide whether to return control of the US House (and perhaps the Senate) to the GOP after four years of Democratic majority.

As I posited during the Presidential election in 2008, the enormity of the economic condition was bigger than any one man or political party. In fact, I offered that Republicans could vote for Obama and the Democrats McCain if they wanted to take a longer-term approach to the leadership of this country. That's proved true thus far. The frustration is palpable as we ready for the next iteration of our Democratic process.

Conventional wisdom dictates that if the Republicans regain control, a semblance of fiscal conservatism will emerge on the beltway. That may be true but we would be wise to respect the unintended consequences such as the specter of gridlock or perhaps more meaningful, the inability to administer more drugs to an economic patient that has developed a dependency on a stimulative I.V. drip.

The Unveiling of QE2

Given the anticipatory rally into this event, The Federal Reserve is dancing on the head of a pin. Should they administer fewer drugs than is widely expected, investors who bought the rumor will sell the fumes. If they again stab the economic patient in the heart with an adrenalin needle, it will signal conditions may be worse than expected

As I recently discussed on television, my view is that $500 billion in additional stimuli is already baked into the cake and will likely be sold. Perhaps more intriguing, however, is the interest rate dynamic. If the synthetic sweetener is softer than expected, perception could shift towards a legitimate recovery that triggers an up-tick in rates. If, on the other hand, policymakers attempt to shock the market back to life, it could set the stage for an inflationary rage.

While several Billionaires Have Screamed Bull by offering that either scenario will be positive for the market, I would humbly note that such a situation could catch the hedge fund community offsides. As it stands, big money has the same bet on across the board: long risky-assets and short the US dollar, and there's a stealth short base in VXX (volatility) options mixed in for good measure.

The tape trades great as evidenced by the S&P logging the best October since 2003, not to mention the buff corporate credit market that suggests higher equity levels still. While corporate debt is sandwiched on either side by a sticky sovereign situation and still-extended consumers, perception is reality in the marketplace and we must respect that dynamic.

As evidenced in the chart below juxtaposing commodities against the greenback, however, the negative correlation between asset classes and the dollar remains very much in play. This has been a long-standing theme in Minyanville -- "asset class deflation vs. dollar devaluation" -- and while it was interrupted by European Disunion, it's back in a big way. Should that trade begin to unravel -- and I believe the dollar has room on the upside for a trade -- we could see a massive bottleneck at the exit ramp.


Click to enlarge

Friday's Unemployment Report

Economists estimate non-farm payrolls to increase by 60,000 and the unemployment rate to hold steady at 9.6%. I will ask you to write those prognostications on a piece of paper, shred them and use the remains as kitty litter, if you happen to fancy felines as I do.

Two reasons: First, the government will already have those numbers in their back pocket when QE2 is announced so reacting to that news will be a lesson in futility. Second, they're simply not accurate. While some statisticians report an underemployment rate close to 17%, others peg the number closer to 23%.

We know there are three separate conversations when discussing the state of our union: The stock market, the economy, and the underlying social mood (reality), currently ranked one, two, and three in terms of perceived stability. While it's entirely alright to discuss all of them, the onus is on us not to confuse the topics of conversation when mapping strategies for our financial health.

S&P 1150 and NDX 2050 remain important support. S&P 1188 (1220) and NDX 2200ish are near-term resistance.

Good luck today.

R.P.