The June swoon is here, although the reasons for the downdraft may surprise you.

While the talking heads may tell you that the market is selling off because of more bad news from the credit crunch, the real reason for the decline is directly correlated to the increasing likelihood of a Barack Obama Presidency.

On the same day that Obama likely reaches the nomination of his party, polls suggest that he is gaining ground in the head to head battle with Republican nominee, John McCain.

I have stated on numerous occasions that the market is far too disconnected from the consequences of a new administration. Such a state is not surprising given the immediate issues facing investors. The problem though is that by not paying attention to the changes in politics, markets are inefficiently pricing the future, at least in the short term.

Short-Term Implications for Capital Gains Tax

Now, Democrats controlling all branches of government, except the Supreme Court may not be a bad thing in the long run, but there will be some interesting short-term actions that will directly impact stock values.

Most significantly, is the change in the capital gains tax. Obama is on record stating that he will raise this important tax by as much as 5-10%. That may not seem like a big deal, but such a jump is negative for stocks.

So what is an investor to do with this information?

Retirees: Start Selling Now

For those long term buy and hold investors, there really is not much to do other than watch your portfolios drop in value. However, if you’re a trader or investor nearing retirement, the increase in capital gains presents an interesting opportunity to sell stocks.

If I was within 3 years of retirement, I would seriously consider selling stocks, sitting in cash, and then rotating your portfolio into bonds. Keep in mind, this is not a move to make in one step. Here’s what you need to do.

First, sell some stocks and then wait for bond prices to drop (or yields to rise.) With inflation rising, and an easy monetary policy of the Federal Reserve rates, long term yields can be expected to go up.

Add in the removal of foreign interest in Treasury securities and rates may go up even further!

Active Traders: Short the Market with Puts

For traders the play here is to be actively short the market with puts. Using options allows for leverage and the potential for greater returns (make sure you understand the risk first). I would not be naked with these puts, but instead hedged against long positions.

It really is a good time to sell stocks. If you have long term capital gains, why not lock in at a lower tax rate, assuming rates rise? It might be the easiest money you make in this very turbulent time.

Make no mistake about it-there’s a ton of risk in this market and a lot of investors are about to get burned! Unless you squeeze the risk out of your holdings, you’re going to find 2008 a better year to lose a fortune than to make one. Sign up right now for your risk-free trial subscription to Louis Navellier’s Blue Chip Growth, and he’ll send you his latest free report 257 Stocks to Sell Now! Don’t miss out!