I am ready to start my brand new 396 on my 69, but when I hooked up my new Interstate battery to it the small wire coming from the positive side of the battery cable instantly became hot and started to smoke. The back of the alternator sparked as well at the same time. I have checked for grounding issues and wires that could possibly touch to cause this, but no luck. The motor before being pulled for rebuild turned over fine for compression check and all lights etc. worked. It seems to weld itself to the post even if I start with the positive side first and then the ground or vice versa. Please help I would like to drop the hammer on the 375 hp soon! Could this be that the voltage regulator has stuck or gone bad?

Sounds like it is or has been hooked up backwards. Even a bad voltage regulator should not cause sparks from the alternator. Could be voltage regulator problems and probably shorted alternator diodes.

You have a dead short to ground somewhere in the red main power feed wire between the junction block behind the battery and the horn relay and voltage regulator; the pigtail that "smoked" is a fusible link. Is the main red charge lead connected to the post on the back of the alternator, or is it hanging loose somewhere?