market following elections -ZT (图)

With tomorrow's election, the market will likely look to this one event for short-term directional cues this week. As everyone knows, there are few things the market hates more than uncertainty, and this Election Day has been an uncertainty for several months. The potential outcomes have been hashed and re-hashed in every major news and financial outlet, and I think the public has become acutely aware that we may not have a president-elect come Wednesday morning. Given this, what effect can you expect on the market? Well, knowing that the market is also keenly aware of the possibilities, I expect that expectations of the unexpected have already been somewhat factored into stock prices. Evidence of concern for this week's market activity is apparent in the recent daily activity of the CBOE Volatility Index (VXO - 16.57). The S&P 100 Index (OEX  540.65) has found itself in rally mode since October 25, rushing from 524 to 541, a 3.25-percent move over four trading days. During this small rally, the VXO dropped from 16.87 to 16.57, a decline of only 1.78 percent. In similar activity at the end of September, the OEX rallied from 529.6 to 535.2 (1.06 percent). During that same time, the VXO imploded a whopping 14.24 percent, moving from 17.13 to 14.69. The bottom line here is that despite a larger rally than that seen in September, the VXO has remained high, indicating that options traders are expecting some volatility after the election. On the subject of the latest rally, it's interesting to note that the market is typically in rally mode leading up to Election Day. Since 1970, there have been very few years when the market failed to surge over the last few days running up to the election. One such "off" year was when incumbent Jimmy Carter was battling California Governor Ronald Reagan; the other was 1988, when Vice President George Herbert Walker Bush was pitted against Massachusetts Governor Michael Dukakis. The chart below details the trading activity for the 10 days leading up to each election since 1970. On the flip side, here are the results for the market following presidential elections. While the results are fairly random in direction, they show an obvious increase in volatility after Election Day. That is, the breadth of movement is notably higher than what transpires ahead of the big vote. The most recent presidential election, not surprisingly, resulted in fairly hefty declines, as the identity of the new Commander in Chief was unclear well into December. From a longer-term perspective, the market is getting some mixed signals right now. However, one signal that is not mixed is the one emanating from short interest on the Diamonds Trust (DIA  100.38). According to October data, DIA short interest dropped 26 percent in one month to rest at just more than 14 million shares. While this is a significant drop, the larger picture comes into focus by looking at these figures since the beginning of the year. Since January, the number of shorted DIA shares has been cut in half. From a sentiment and technical perspective, this activity is less than bullish since it signals waning pessimism toward these shares and less potential for short covering to rally the market any higher.