Since I last wrote this column we have had a couple of election year debates that have settled one issue: the race for the White House is not settled. Going into the debates, many commentators were declaring the race over. There were rumors of the Romney team having trouble raising money and it was thought that it was all over but the vote counting and the Obama victory speech.

We had tried to give some "likely voter" perspective to an alternative view that the race was close, but we were in the minority and even our battleground state numbers were rather gloomy for the Romney-Ryan ticket. The one-sided public perspective, while not a good predictor of the true state of the electorate (see www.unskewedpolls.com previously referred to in past hotlines as a less conventional source of polling), did make a positive contribution.

The appearance that the re-election of Barack Obama was a fait accompli gave the financial markets a sense of certainty with regard to one of the biggest question marks that had been overhanging the markets all year. If there is one certainty to trading the financial markets it is that investors hate uncertainty. It invariably leads to lower stock prices.

When it appeared that a re-coronation of the President was certain, investors, regardless of party affiliation, no longer had that uncertainty clouding their points of view and the market generated a nice run-up over the third quarter.

That all changed with two coinciding events: one has garnered a lot of press, the other very little. The first very public event was Mitt Romney's clear victory over the President in their first debate. Of course, the challenger's just standing toe-to-toe with the incumbent gains some status from the first debate, but the polls, focus groups, commentators and even the administration seemed to conclude that Romney's victory exceeded expectations. And to a much lesser degree, Ryan's showing of competency this last week made him and the ticket a responsible alternative, something Sarah Palin could not do in 2008.

The second, less publicized event was the return to closer to reality in the polling techniques that had created the bandwagon effect for President Obama in the first place. Barack Obama won in 2008 with a margin of 7.3%. George Bush won in 2004 with a margin of 2.3%. In constructing a likely voter poll, a pollster has to decide whether we are closer to one election or the other, or somewhere in between to determine how much weight to give to the Democrat leading responses versus the Republican.

With actual election experience suggesting a Democrat weighting choice of between 7.3% and 2.3%, the pollsters chose to overweight the Democrat sampling an average of 11.3% between July 10th and September 14th. Even as late as the 9/15 – 9/27 period, the average poll was giving the Democrats an extra 10.5% boost. Heck, Reuters even raised it to 19% in its 9/20 poll, with the President leading by 5% among "likely voters."

 

 

Since September 28th, the average overweighting has been down to 4.8%, and the worst case was reduced to 7%. In other words, the closer we have gotten to the election, the more realistic the polling assumptions have become as the pollsters begin to worry about their final standing in the actual horse race on Election Day. Of course, if you believe that the race won't be closer than four years ago, the conclusion would be that the results are less realistic and you can spot the President a few more points in the polling results now surfacing.

The result of all this is that the election is now perceived as up for grabs. It's no longer a certain victory for the President. That means it is uncertain and the markets don't like uncertainty. Since the first debate, the S&P has slipped 2.2% and the NASDAQ has fallen 3.3%.

I believe that the election is a big factor, too, because the market continues to track the typical election year. I warned back in May that the national polls always tighten up, improving the Republican chances, as we move closer to the election. That increase in uncertainty is reflected in the historical performance of the market averages during October. While we should be near a bottom in the seasonality election cycle, both the presidential year and our broader Political Seasonality Index suggest a second drawdown occurring in the last two weeks of the month, so the downturn may not be over yet.

Still, at least three out of four market sign posts are pointing toward further gains. Interest rates are cooperating and staying low (and with the money supply surging higher last week, it is likely to remain that way).

Economic reports continue to be much improved. Week after week, this month, the number of reports outperforming projections has been unusually high. Last week, seven of the nine economic reports registered better-than-expected results.

One fly in the ointment is that it is earnings reporting season. This will be the first heavy week of reports and early indications are that it might disappoint. With a couple of big tech company reports (Google and Microsoft) this week; things could actually get better or much worse for a tech sector that has taken the blunt of the current correction.

Finally, investment sentiment normally is a contrary indicator. When it is high we worry, and when it low it is time to load up on stocks. Right now it is on the low side and declining, although as the next chart demonstrates we can go lower before a true buying opportunity develops.

Finally, we currently are right down to the intermediate term, 50-day moving average on the S&P 500 Index and have moved out of the overbought regions that the summer rally had taken us to.

As a result, I expect a bounce up as the market tests support, then down if earnings suffer this week, backing and filling around these normal valuation levels. In the end, I know... more uncertainty.

Fortunately, our computer-driven strategies don't have an "uncertain" option. Instead, they are programmed to just go with the percentages as they appraise the market every day on your behalf.

All the best,

Jerry

http://activeinvestmentadvisor.com/uncertainty-reigns/

 

 

Election Year Update: National Polls:
	RealClearPolitics two-month average: Romney 0.1%; Romney up 3.6% from two weeks ago Unskewedpolls.com Avg: Romney +3.9 % On this date in 2008: Obama 7.3% On this date in 2004: Bush +2.3%
13 Battleground State Polls:
	RealClearPolitics two-month average: 8 Obama/5 Romney, Up 2 for Romney Last State poll: 6 Obama/6 Romney, Up 3 for Romney Improving over average poll: 6 Romney/7 Obama/ 1 Tie, Same

Don't forget to watch the debate Tuesday night, 9 pm EDT.

Disclosures

 

 

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