It’s rare when a special Senate election might have a direct effect not just on the Health Care sector, but the broader Stock Market in general… and the direction of governmental policies until the next mid-term election in November 2010.

However, that’s exactly what might happen when residents in Massachusetts go to the polls on Tuesday, January 19th to elect either Democrat Martha Coakley or Republican Scott Brown in a special election to fill the seat of the late-Ted Kennedy.

Should Democrat Martha Coakley win, then the Democrats in the US Senate will maintain their “super-majority” (60 votes) which is the exact number necessary to overcome Republican filibusters – a unique procedure to stall and defeat legislation.  With 60 votes, Democrats can easily overcome filibusters and – in reference to Health Care – pass the Health Care Reform Legislation currently before Congress.

Should Republican Scott Brown win the election – an outcome deemed impossible a few weeks ago – then Democrats would have 59 votes in the Senate – one shy of the ‘magic’ 60 threshhold to overcome the filibuster… and likely doom the Health Care bill along with many other legislative initiatives they planned on passing while they enjoyed the super-majority status.

It is generally accepted (currently) as a certainty that the Democrats will lose Senate seats to Republican this November (2010 mid-term election), and thus lose the super-majority status then (when Congress reconvenes in 2011), so they will want to pass as much legislation as possible while they have the votes.

It may be difficult to understand for overseas observers to understand, but in the US Congress, a simple majority is sometimes not sufficient to pass key or important legislation due to the filibuster procedure in the Senate (see this link on the “Filibuster” from Wikipedia for full information).

What is the bottom line?

If voters in Massachusetts elect the Republican candidate Scott Brown, then odds are overwhelming that the current Health Care bill as proposed (and passed both chambers) in Congress will not be passed… I would go as far as to say it will certainly not be passed (in current form).

For a full discussion, see the following post from Mish at Global Economic Trend Analysis entitled, “Massachusetts Upset in the Making:  Scott Brown Pulls Ahead of Martha Coakley.”

How does this affect Health Care Stocks?

This question is not as easy as “If Scott Brown wins, then the Health Care Bill is dead,” because it depends on what happens, as in whether Democrats fail to pass any bill through the Senate, or if they moderate the bill to bring on one or two (or more) votes from Republican Senators such as Olympia Snowe (which might be crafted to be favorable to Health Care companies).

First, let’s take a current look at the Health Care sector ETF – symbol XLV:

The ETF is currently just shy of the critical $33.00 per share overhead resistance level, which reflects the August 2008 swing high.

It would be very bullish if price can rise above the $33.00 level, and would argue in favor of a retracement at least to the $30.00 level if not.

We should know on Wednesday or Thursday of this week as to how the Health Care industry (companies and stock prices) react to the results of Tuesday evening’s election – whether the seat stays in the hands of the Democrats or switches to the Republicans, which again would be a major defeat to Obama and the Democratic Agenda in Congress.

Of course,  a Democratic defeat would affect policies well-beyond Health Care, but for now, it is easier to focus on Health Care stocks and how they react in the week ahead.

So in the course of your market analysis this week – with the three-day weekend – pay particular attention to the outcome of the carefully watched special Senate race in Massachusetts and what that might mean for your trades, investments, or portfolio.  Study this issue in more detail.

You might very well need to make a few key shifts if the Republican wins.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade