Election Erection?

The Market pushed higher into the election with the confidence of a sailor on shore leave with a wad of bills. Essentially, the market is acting as if it were completely immune to any bad news. All outcomes regarding the elections as well as Fed Policy, corporate earnings & geopolitical issues are only being considered as fuel for further upside. This is a one-way street!

The problem of course is that in the financial markets there is no such thing as a one-way street. Amazingly, market participants fail to recognize this fact at the end of every good run. They always believe that “this time is different”, and press their bets by overweighting positions and getting overly invested as well as adding high beta names to their portfolios. Unfortunately, the reversal in good fortune seems to come unexpectedly and inexplicably. Furthermore, all gains & then some are given back in a blink of an eye while market participants wonder what hit them. They usually find themselves caught with their pants down while measuring the drapes in their soon-to-be newly decorated room that they have planned for with their “handsome profits”. Not only does Mr. Market catch most players with their pants down but he administers a super wedgie in the process.

The elections will soon be over – or will they? The thought of possible recounts and lawsuits in the same vein as the 2000 election is enough to ruin any bullish party. Don’t kid yourself – there is a lot at stake and the numerous close races across the country will surely be challenged. Should this occur and control of the Congress and Senate not be determined over the next couple of days, the market will most likely suffer a major blow. In fact, even if the election process runs smoothly, the market is set up for a potentially large “sell the news” event. However, we still expect dip-buyers to show up in this case before the serious downside occurs.

If you held a Taser to our Head
Today’s upside action was on increased volume and positive breadth. Oil was down but only a negligible amount despite the threat of the potential Democratic sweep. Like many Hedge Funds, we have misjudged the relentless nature of this rally. We are frustrated for having missed a great trading opportunity, but still feel confident that lower prices for long term investments are inevitable in the not too distant future. We continue to carry an “unhealthy” hoard of cash and numerous short positions in semi-conductor land. Our large exposure in the Oil & Gold sector has been our saving grace – allowing us to participate in the upside a little. However, we have since cut back on our Gold plays looking to remount them on a pullback.

This is a tough business – the Money Management “thang” – but someone has to do it, and there are always better times

Hope you traded well!

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