A journalist wrote in a renowned financial newspaper that investors should acknowledge the fear and forget about logic.

Fear does play an important part in investment decisions these days but it is definitely not wise for all of us to forget logic because, once the fear factor dissipates sooner or later, logic has to take over.

It has been a catastrophic week for the stock market with global indices melting like chocolate under the hot sun – there is no stopping it from happening. When was the last time we saw the Dow Jones Industrial Average (DJIA) falling by 3%-5% each session over several trading days? When was the last time we saw the Straits Times Index (STI) plunging by similar percentage points as the US market over consecutive sessions?

Has anyone noticed that the Jakarta Stock Exchange had to be halted because it fell more than 10%? Additionally, it was in October 1987 – the Black Monday – when we last witnessed the Nikkei 225 diving by a magnitude as much as 9.38%.

Coincidentally, the Black Monday and the “Black October” – as I term it – have occurred in the same month. Is October such a bad month for the stock market?
Just for the records, the DJIA lost 17.3% since the start of the month while the STI shed 13.8% in the first five days of October. As for the other global financial markets, losses are either of a similar magnitude or worse in some cases.

As a colleague had joked, he said that investors without heart problems would have developed such ailments watching the markets while those who have heart problems are probably in worse situations.

At the time of writing at 1am on 9 October, the DJIA is down 50 points – a sixth consecutive down day for the US market despite an emergency rate cut by the Federal Reserve, bringing the Fed funds rate from 2% to 1.5%.

Why Did US$700b Fail To Excite?
We, part of the investment community, love surprises and stock markets rallied strongly when news of the rescue package was announced. It then took a while – perhaps too long – for the US legislators to put up the package, to send it to the Senate and House of Representatives for a crucial vote, by then the surprise element was already gone.
To make matters worse, politics came into play and the rescue package was thrown out of the window.

This was the last straw and even when the rescue package was passed, little boys and girls who have been eagerly anticipating the new toy no longer felt that the toy was worth anything.
In some sectors, it was thought that the package was too small to do anything to help the ailing US economy. When times are bad, people always seem to focus more on the bad rather than the good and, thus, good news become bad news.

Now that the package has been passed, this is probably the last big thing that President George W. Bush will be doing for the US economy. He will pass the baton to either Republican John McCain or Democrat Barack Obama, who will inherit a whole truckload of problems.

Will The Presidential Election Boost The Stock Market?
Traditionally, the election years have usually been good for the stock market because the incumbents have tended to “window dress” the economy and stock market so that his colleague within the same political party will stand a better chance of becoming the next President.

However, this has been a wretched year for the stock market and, like it or not, the remaining months of the year will probably not fare too much better – unless the year-end rally overcomes fear.

The other wild card that may support a rally could really be the US Presidential election which, over the past 28 years, has normally been good for the stock market during the election month – November.

Ronald Reagan
When Ronald Reagan, a Republican, won the election in November 1980, the US stock market rallied sharply before giving up most of the gains before the end of the month.
Despite surrendering all the gains, the earlier rally seemed to suggest that American patriotism does play a part in pushing up the market (remember the post-September 11 rally?) as a welcome gesture for the new President.

The story was reversed in 1984 when Reagan was once again elected. Although the Reagan Administration ushered in a period of prosperity without recession or depression, his foreign policy during the Cold War era was often criticized for being extravagant when it comes to the defense budget.

It could be this reason that caused the stock markets to fall when he was re-elected as President in 1984 although other reasons could have come into play.

George H.W. Bush
The man, who famously made the decision to attack Iraq in the Gulf War, was the Vice President of Ronal Reagan.

His election victory did not help the stock market although the DJIA did climb towards the end of the month after falling slightly in the beginning.

The years when he was in the White House did not spell good periods for the economy as growth was weak while budget deficit was high. In 1992, a year after US soldiers crushed the Iraqi soldiers, the Republicans lost the White House to the Democrats.

Bill Clinton
As a Democrat, his appointment as President did not go down too well with the financial community because it has long been thought the Republicans are pro-business while Democrats are bad for the economy. How wrong they were.

From the period 1992 to 2000 when Bill Clinton was in office, the DJIA surged from 3,223 points to 10,940 points before the tech bubble burst.

When news broke that a Democrat will be the US President for the next four years, the DJIA reacted negatively but not harsh enough to cause a sell-off. Perhaps it was his good performance during the first four years of his Presidency that gave investors confidence. When Bill Clinton was re-elected in 1996, stock markets rallied strongly.

George W. Bush
Just like his successor, who will be taking over a messy economy in 2009, George W. Bush took over a troubled economy in 2001 after he won the election in November 2000.

The bursting of the tech bubble meant that stock markets were unlikely to react anyway to his victory. The market moved sideways when the Republicans took back the White House from the Democrats.

By November 2004, the worries of the tech bubble were long gone and the Bull Run was in its second year. President Bush was re-elected and the markets cheered his victory.

Conclusion
It seems that the stock market has tended to be more cautious whenever a new President gets elected but markets have rallied in the election month.

We are now suffering from a loss of confidence in the market and unless sentiment improves from now till the time Americans vote, we are unlikely to see a post-election rally in the US market.

At this point in time, most of the technical levels have been broken convincingly and easily, the DJIA should find the next support at 9,000 while the STI may hold above 1,950.

It is not yet time to enter the market in an aggressive manner and the preferred trading strategy would be to do intraday or very short-term trades. This is not an easy game to play unless you have the time and guts to ride the volatility.