Stocks See Classic Risk-On, Reflation Trade

Stocks see classic risk-on, reflation trade.

I've been asked extensively about the source of the midday rally. While much of it is based on wishful thinking that one candidate or the other might be winning, and some of it may be based on erroneous information, the one point that is absolutely clear is that this is a reflation trade:

1) dollar down

2) commodities and commodity stocks, along with global industrials, are up

3) transports outperform

(Read more: What's Behind the Election Day Rally: 'It's Running on Rumors')

It is not obvious at all to me that the market is telegraphing any kind of "win" for Obama or Romney:

1) a weak dollar, many argue, implies a win for Obama, since the Fed policies of QE would likely continue; (Read more: Did Wall Street Just Give Up on Mitt Romney?)

2) strong gains in defense stocks, as well as general weakness in hospital stocks, would argue for a win for Romney. (Read more: Traders Bet on 'Romney Stocks')

What the market DOES seem to be saying: the two biggest concerns for the market may be resolved. The markets seem to be telegraphing that:

1) there will be a clear winner tomorrow, and that the election will not drag on for months in litigation; and

2) the "fiscal cliff" issue can be resolved sooner rather than later.

On the fiscal cliff, two things stand out:

1) the poster child for sequestration, Lockheed Martin, is sitting at a 52-week high today; LMT has publicly stated that sequestration (mandated cuts in spending) would be a serious problem for them

2) options on the Volatility Index (VIX) is not showing any appreciable steepening going out several months — that is, it's not any steeper than it has been in previous months. This implies traders don't think the risks are dramatically higher.

—By CNBC's Bob Pisani

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