October is over at last - Hooray! And How Presidential Elections Impact the Stock Market

Well it's sure nice to have October over. What a month. October should now be considered a four letter word. By the time that "ugly" (not the word I'd prefer to use) month came to an end, major US stock averages were down approximately 20%, and emerging markets were down almost 30%, just for the month! (Warning for when you open your monthly statement). Although things will continue to be pretty crazy, I believe there are 3 main positive factors:

1. Widespread fear and pessimism - You can't find a Bull on Wall Street to save your life. Practically everybody in Bearish and feels it's "obvious" that the market has to go down. Well, the market never does what "everybody" thinks. There's an old saying on Wall Street - "If it's obvious, it's obviously wrong!"

2. The Government Bailout is essentially a giant stimulus package - Like it or not, the amount of liquidity that is about to enter the economy is enormous and it will bump the economy significantly.

3. The news is still bad - the market is a barometer for the future, generally 9-18 months out. Stocks tend to bottom and rally while the news is still bleak, well in advance of good news, leaving most individual investors in the dust. As much as it hurts, investors have to get in while the news is still bad.

Where the low for this market is nobody knows, but it looks like we may have to re-test the lows before we can have a strong bounce. 8200 on the Dow is a strong support level, if that breaks we'd likely see the 7800 level that we saw on October 10th. It's most likely too late to sell as it should bounce very quickly and strongly when it does, and many people who sold will end up getting back in higher than where they got out.

What does the election mean?

The long term outlook based on the election may surprise you. Since 1926, the S&P 500 has performed better under a Democrats than Republicans - 66.0% vs. 44.7% total return or 6.7% vs. 4.6% annual return. Small stocks did even better, with 8.2% vs. -3.5%. Hopefully that will hold true once again.

For now, if you're a news junkie, fasten your seat belt and keep the Pepto-Bismol close by. Otherwise, go out and have some fun. The sun will continue to come up each day.

Give me a call with any comments or questions.

Cheers -Keith

Below is an excerpt from the HS Dent Newsletter.

The market has violated every

technical rule in the book and will likely continue to given the forced

and panic selling from hedge funds.

What we have here is the $2 trillion hedge fund industry blowing up

and melting down after leveraging money as much as 30:1. That is

why the selling is so irrational and persistent. This crisis began with

the slowdown in housing, but its real cause was a new class of

mortgage (CMO) and debt-backed (CDO securities that were rated

AAA by the rating agencies, then leveraged heavily by hedge funds

and investment firms to take advantage of their "quality" and low

volatility, then insured through credit default swaps (CDS) that

were unregulated (and hence had questionable assets backing

them), and then those CDS derivatives were traded and leveraged

growing to a massive market of $60 trillion dollars. Almost no one

saw this coming as the securities that underlay this whole leverage

scheme were AAA rated. But they shouldn't have been and now the

whole financial system is melting down.

Many indices from the S&P 500 to the Nasdaq to the EEM (emerging

markets) have made new lows, although the Dow held above its

10/10 lows of 7,882. The Nikkei in Japan fell below its 2003 lows

before rallying. Hopefully we have a seen a bottom for months to

come and we continue to rally towards 12,000 or so well into 2009.

If we rally to the most likely near term target of 10,000 - 10,100,

that could represent the 4th wave of a broader A-wave that could

see a final bottom closer to 7,000 if there is bad news ahead on the

economy, or more bank crises. The strongest support for U.S.

stocks is the 7,200 - 7,400 area where the 1998, 2002 and 2003

bottoms occurred. There was also a minor low in late 1997 close to

7,000, so the range is 7,000 - 7,400 for very strong support.

All of the sharp rallies thus far have merely

been short squeezes, which was typical in the 1929 - 1932 crash. For

now, there is a better chance that we have seen the lows for now and we

get a continued, but choppy rally for months ahead.

The irrational panic selling in the stock market is not coming as

much from normal investors and mutual fund managers as in the

early 2000s. It is coming from highly leveraged hedge funds that

are incurring huge losses and redemptions which forces them to

sell all of their good stocks as well to get liquid.

If the market does end up bottoming on 10/10 at 7,882

on the Dow, then an eventual recovery

from an increasingly successful Treasury plan will be the

likely scenario. And then inflation pressures, rising

interest rates and commodity prices will be very likely

and ultimately defeat such a rally. The stock market

could advance more to 12,000 - 13,200 in that scenario

and into spring or even summer (March - September).

That will give investors a chance to sell stocks at more

attractive prices and to unload real estate in a slightly

better market, as real estate won't rebound for many years!