Will the Election Produce a Big Buy Signal?
By Jeff Clark
November 4, 2008

It's Election Day... and nothing good can come from it.

The election has three possible outcomes. I don't think the market will like any of them in the short term...

Outcome No. 1: Obama wins and the Democrats increase their majority in the House and the Senate.

According to the polls, this is the most likely result. And the market may have already factored this in. But the reality of single-party control in Washington D.C. is much more frightening than the statistical probability of it. So despite the stock market's ability to discount future events, if the Democrats sweep the elections, then the market will sell off.

Think about it... Obama's already promised higher capital-gains rates and higher dividend taxes. Assuming some investors still have capital gains, they'll sell before higher rates take effect. And higher dividend taxes make stocks less attractive to new money.

Wall Street likes Washington gridlock. Most new laws, while well intentioned, have unfortunate consequences. So anything that prevents the bozos on the Hill from mucking things up even worse is a good thing for investors.

Then again, the Republicans had total control of Capitol Hill a few years ago, and those goofballs still couldn't get anything done. Perhaps gridlock will thrive anyway.

Outcome No. 2: McCain wins.

Despite the overwhelming lead Obama has over McCain in most of the national polls, I suspect the race is much closer. A McCain victory might at first appear to be a positive thing for the stock market. After all, he's promised to keep the current capital-gains and dividend tax rates, and to lower corporate tax rates.

But the immediate ramifications of a McCain victory will be negative.

In 2000, Al Gore led George W. Bush in most national polls. Many networks declared Gore the winner on election night, but then had to recant that announcement when Bush pulled ahead in Florida. We didn't see official results for several weeks as accusations of voter fraud, hanging chads, and malfunctioning vote machines swept through the court system.

The stock market fell 12% in the six weeks following Election Day in 2000. Can you imagine the unrest if John McCain actually pulls this rabbit out of his hat?

The national media has already proclaimed Senator Obama the next president. Any result that differs from that is going to face accusations of voter fraud and court challenges for at least the next several weeks.

That's bad for the stock market.

Outcome No. 3: The Bush administration uses the financial crisis as an excuse to impose martial law and delay the election results.

I know how crazy that sounds. But several of my friends on the trading floor have mentioned this scenario to me.

Frankly, I doubt it will happen. But I also never thought the U.S. Treasury would be buying equity positions in banks. And needless to say, imposing martial law will crash the stock market.

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So I don't think today's results – no matter what they are – are going to be good news for the market. And traders should prepare for some downside action.

But I'm actually bullish on the stock market going out a few months. I'm waiting for the S&P to come back and test last week's breakout from the 920 level. And the election results provide a good reason to do so.

If we see 920, that'll be the time to buy.

Best regards and good trading,

Jeff

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