Happy election day! The markets are in a positive mood. The midterm elections will be over tonight and will remove a level of uncertainty. Plus, market participants are expecting the Federal Reserve to announce a new quantitative easing program tomorrow. The U.S. dollar was slipping on these QE2 expectations with a 0.7% decline against a basket of currencies. Meanwhile the bond markets continued their four-day bounce with yields on the 10-year U.S. treasury slipping to 2.60%.

The U.S. dollar weakness was making a splash in the commodities market. Crude oil rose +1.2% to a new three-week high near $83.98 a barrel. Sugar (+2.2%) is trading at new 29-year highs. Cotton (+3.8%) has hit new all-time highs in its entire 140-year history of trading in New York. Metals are seeing strength as well. Silver is up +1.2%. Copper is up +1.25%. Gold futures are up +0.4% to $1,356.00 an ounce. Australia made headlines this morning when they announced a surprise rate hike of 0.25% to 4.75% in an effort to protect against future inflation. Meanwhile the euro was gaining ground against the U.S. dollar in spite of new worries about the PIIGS countries. Ireland was the main culprit today with concerns over that country's deficits pushing yield spreads on the Irish 10-year bond toward their all-time highs (against the German bund).

Of course this dollar weakness is being fueled by extremely high expectations that the Federal Reserve will announce a second round of quantitative easing (QE2). Essentially the Fed will start buying hundreds of billions of dollars worth of U.S. debt to drive down interest rates in an attempt to increase borrowing and spending. This pushes the value of the dollar lower, makes U.S. exports cheaper and more competitive, raises inflation, and makes commodities more expensive since it takes more dollars to buy them. Almost everyone expects the Fed to announce QE2 so the question is how big will this program be? The Wall Street Journal expects the Fed to announce a $250 billion plan with language suggesting the Fed will continue to roll out more and more QE as necessary if $250 billion isn't enough. Bloomberg is estimating the Fed will announce a $500 billion program. Bank of America and Goldman Sachs are expecting $1 trillion or higher. If the Fed announces anything less than $500 billion I would expect an immediate sell-off Wednesday afternoon. However, if they announce a bigger program and the market rises, I suspect it's only a temporary move that will be sold on Thursday - just my opinion. Essentially, I'm warning readers to look for a "sell the news" reaction whether it happens on Wednesday afternoon or Thursday.

The big event today is the midterm elections. Most polls show the Republican party is poised to pick up enough seats to regain majority control of the House. Currently the Republicans only need +39 seats to gain control and many are expecting them to win 45-to-50 seats. A few analysts say there could be a +70 seat gain, which would come close to the 1938 midterm election where the Democrats lost 72 seats in the House. Meanwhile the Republicans are also expected to make gains in the Senate but not enough to gain the +10 seats they need for majority control. Healthcare stocks are rising on expectations that a new Republican controlled House will blunt the recent healthcare reform laws.

Taking a look at the markets the Chinese Shanghai closed down -0.2%. The Hong Kong Hang Seng barely rose +0.08%. The Japanese NIKKEI gained +0.06%. In Europe strong earnings reports helped buoy stocks. The English FTSE rallied +1.1%. The German DAX gained +0.75% to close at new 28-month highs. The French CAC-40 rose +0.6%.

The U.S. market is seeing a widespread rally with nearly every sector index in positive territory except for the banks with the BKX and BIX indices both down about -0.4%. The best performers are casino stocks (+2.5%), healthcare (+2.5%), homebuilders (+3.7%), the oil index (+1.8%) and the oil services index (+1.6%).

The S&P 500 index is up +0.9% and poised to set its highest close in nearly six months. The NASDAQ Composite is up +1.0% near 2531 is on the verge of closing at its highest levels in two years. The Dow Jones Industrial Average is up +0.7%, trading just above the 11,200 level, and also set to post new relative highs. The small cap Russell 2000 index is up +1.6% with a strong bounce from the bottom of its recent trading range but it has yet to breakout convincingly past resistance in the 710-711 zone. It is worth noting that the Dow Jones Transportation index is up +1.1% and poised to close at new two-year highs.

Chart of the S&P 500:

Chart of the NASDAQ:

Chart of the Dow Jones Industrial Average:

Chart of the Russell 2000 index:

Chart of the Dow Jones Transportation Index: