Obama Rally: I smell a Rat!

Good Afternoon Everyone!

I will be brief today. Stocks staged an election day rally today as the DOW surged over 300 points.

However, when you look a little deeper into the numbers, the rally was not all that impressive. First of all the volume continues to be extremely light at the NYSE. The market needs to confirm this move higher by having stocks rally higher on strong volume. We did see this today.

Another thing that I found interesting today was the big rise in demand for the 10-year (click here to see the chart) . Why would investors be piling into treasuries after such a bullish move? Investors should be flying out of treasuries and into stocks forcing the 10-year yields to rise. As you can see from the chart above, the 10-year yields fell off a cliff today.

This tells me that you are seeing a serious flight to safety by some of the boys in the bond market. I always follow their moves closely. They are a much more sophisticated group of investors than the "bubble boys" on Wall St. Perhaps they are sensing that the bottom is about to fall out of this rally?

They know that an Obama/Democratic landslide would be bad for equities. Even worse, a strong democratic sweep could eliminate the ability of a filibuster. Wall St. will most likely selloff equities on this news because Obama will then be able to get most of his aggressive spending legislation through Congress without opposition. Its usually never good for either the Democrats or the Republicans to have all three branches of the government. A system of checks and balances is almost always the healthiest form of government.

Commodities/US dollar collapse

Here is another reason why I smell a rat today:

"Nov. 4 (Bloomberg) -- Surging prices for oil, copper and gold sent commodities rallying as a U.S. Election Day plunge in the dollar boosted the appeal of raw materials as a hedge against inflation.
The Standard & Poor's GSCI Index of 24 commodities jumped 7.5 percent to 467.26 at 3:25 p.m. in New York, the biggest gain since August 1990. The Reuters/Jefferies CRB Index gained 5.3 percent, the second-biggest rally since 1956. Crude oil jumped as much as 12 percent, gold rose the most in six weeks and corn touched a three-week high.

The dollar fell the most against the euro since the 15- nation currency's 1999 debut. U.S. stocks advanced in the biggest rally on a presidential Election Day in 24 years. Speculation that Democratic candidate, Senator Barack Obama, who leads national polls, will win against Republican John McCain helped send the dollar lower and lift commodity and equity markets.

``With the Democrats, there's the assumption of the potential of more inflation, given their spending plans,'' said William O'Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey. ``There's general enthusiasm out there. It's happening in all the markets, including commodities and stocks. The dollar is a huge factor today and the idea of more inflation will send commodities higher.''

Final Take:

Gold also surged $40 today as the dollar tanked. The traders in Chicago aren't stupid. They understand that Obama is going to attempt to spend this country into oblivion. Clinton attempted to do the same thing when he got into office in the early '90's. What Obama(assuming he wins) will learn quickly is you cannot spend what you don't have. This lesson could cause a lot of pain in the stock market because it might take a bond market dislocation to get this through his head.

In his defense, Obama does seem like a pretty reasonable guy at least at face value. Lets hope he understands that he cannot spend like a homeowner with a giant home equity loan. We have $11 trillion in debt and if he raises taxes, Obama better realize that some of it needs to go towards reducing our deficit.

Bottom Line:

Lets see the results tonight before I get ahead of myself. I personally think today was just a "feelgood" rally as the country looks forward to likely change in leadership. The CME traders are well aware that Obama's higher taxing and spending programs are not a positive for the stock market. As a result, they decided to run and hide in commodities and treasuries awaiting the fallout of the election results.

Feel free to go long here, but I am not buying this rally folks. A weak dollar, stronger metals, and higher commodities tells me that investors are again beginning to pile into hard assets. This does not bode well for the stock market. Lets see if this trend continues.

The "Obama honeymoon" on Wall St. will be a short one once investors realize what a far left President means for the markets.

That is if he wins.

Stay Tuned!