Massachusetts

As I'm writing this the market is selling off, giving back most of Tuesday's gains. I've had a few folks question me on why that should be the case given Scott Brown's Massachusetts's upset Tuesday night. Here's my two cents.

First I think we're seeing a sell the news mentality. Markets discount the future. It always is more interested in tomorrow than today. Coakley's plight and the possibility of a Republican pulling off the political upset of the century began to seep into investor's mindset over the past two weeks. By yesterday most polls showed her running behind and the Democrats began to lower expectations about her survival over the weekend. It's likely Tuesday's rally in the face of the election came in anticipation of Brown's victory.

Second I think it is somewhat unclear where this means we're headed. Now in the short term it means that the Democrat's Washington agenda has been compromised. Initiatives such as a carbon tax for example are likely dead in the water this year. This election along with Democratic gubernatorial losses likely mean a democratic tack to the center over the course of 2010. I think that this is a net positive for stocks in 2010.

I am not as prone to thinking that health care reform is completely dead in the water as perhaps some others. I still think we're going to have some kind of health care package this year-the President and the Democrats have staked too much political capital for them to just go away on the issue. Whether they will try to pass the bill through now as it currently reads or tear it up and start from scratch is probably a better investment issue to analyse. As this becomes more clear in the days and weeks ahead then I wouldn't be surprised if health care stocks and maybe the market in general jostle around. Health care companies are still statistically cheap. I'm long certain health care ETFs in appropriate client accounts and I think the sector could do well in 2010. But it wouldn't surprise me if they went to sleep and even drifted lower in the coming weeks and months.

Finally I keep coming back to the troublesome fact that the market is up close to 10% since November first. That kind of advance at some point needs to be worked off. We've touched upon this a couple of times with charts in the past week. Stocks have now experienced three pretty good sell offs in the past six trading days {that's 50% for those of us arithmetically challenged.}. The action of the tape continues to be choppy. This is often the action that makes for short term tops. Not saying that this will happen but like we discussed last week it is the sort of action that makes us want to be more vigilant on stocks. Time to dust off and review the defensive pages of the playbook in case we need them in the coming weeks and months.