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The agony of being short: Traders 'short' circuited by rally

A trader holds his head in his hand on the floor of the New York Stock Exchange (NYSE) in New York.
Scott Eelis | Bloomberg | Getty Images
A trader holds his head in his hand on the floor of the New York Stock Exchange (NYSE) in New York.

A hedge fund trader I was speaking with last night summed up the frustration that many of his trader friends have been experiencing this year. There has been a lot of pain because many traders had been set up to be short stocks and Treasurys this year.

That trade has not worked out. Here is why:

1) A lot of macro traders got short after the Federal Reserve announced it would begin tapering at the end of last year. They had assumed that the main reason the markets were up in the last four years—and that Treasury yields were so low—was the Fed's tapering program. So far, this assumption has been wrong.

2) In part, bond yields have been low because economic data so far does not support higher yields, despite Barron's claim of 4 percent gross domestic product this year.

3) The paradox, as my trader friend noted, is that stocks are holding up because of the strong belief that the poor data is mostly weather-related.

Open interest in the S&P 500 options has dropped, indicating short covering is a large part of the rally earlier this week. In other words, many traders threw in the towel on a market correction once the S&P pushed to new intraday highs on Monday.

4) What about the disappointing economic data? Traders believe that will change, and there is some history to support that idea: a Deutsche Bank note making the rounds of trading desks on Tuesday noted that the last time we had a real cold winter—in 1996—activity dropped just as it did this winter. It then revived in the spring: both nonfarm payrolls and interest rates went up.

Nobody should get too complacent, however: Stocks keep trying to break out in a big way but don't seem like they have the muscle. Sure, the "Big Mo" (momentum) names like Netflix, Yelp, Tesla, Facebook and Priceline move every day, all up double digits this year:

Company Percentage change (up)

Tesla 64 percent

Yelp 37 percent

Facebook 27 percent

Netflix 23 percent

Priceline 16 percent

Notice that Nasdaq was down Tuesday, even as the "Big Mo" companies were mostly up. Leadership is narrowing as price points in the Internet stuff sucks up more and more firepower.

Elsewhere

The main trend among retail reports is that most are in-line or beating on bottom line. That said, revenues are light, and 2014 guidance is mostly below expectations.

1) Abercrombie trading up on strong bottom-line beat, but fourth quarter same-store sales down 8 percent. The company's 2014 guidance of $2.15-$2.35 is on the low side of the $2.32 consensus, and the year's same-store sales are down high-single digits.

2) TJX reported earnings of 81 cents, a penny lower than expectations. Revenues are roughly in line with expectations, but as with most retailers guidance is light: $3.05-$3.19 for the year ending in January 2015, vs. a consensus of $3.24.

They are authorizing a new $2 billion stock repurchase program, in addition to the the $970 million remaining on the old repurchase program. That is 5 percent of the company's outstanding shares. The dividend will be increased 21 percent to 17.5 cents per share, a yield of about 1.2 percent.

3) Lowe's 2014 guidance of $2.60 is a tad below the consensus of $2.64. Revenue estimates for 2014 of $56.08 billion are also lower than there $56.25 billion consensus. Meanwhile, 2014 same-store sales are estimated up 4 percent.

(Read more: Lowe's posts strong sales growth)

4) Target beat both the top and bottom line, but 2014 earnings estimates of $3.85-$4.15 are at the low end of the $4.15 consensus.

(Read more: Target warns breach costs could hurt future profit)

5) Dollar Tree was light on top and bottom line; 2014 earnings guidance of $2.91-$3.13 is below consensus of $3.25

So far, the negative to positive ratio for retail guidance in 2014 is 7 to 1; that is well above the norm of 2.5 to 1, according to RetailMetrics.

--By CNBC's Bob Pisani.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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