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What's Working On The Street

The major indices were flat today, but the S&P 500 is down over 7 percent this week, the worst week since November.

No one is getting burned by fading rallies. That's why we can't rally. Because fading rallies is what is working. Traders are making money by fading rallies.

As long as you know financials will fall, it's easier to stay short than long. "I mean, JP Morgan falls 5 to 10 percent every day...it's like shooting fish in a barrel," one trader said.

Traders believe a rally is coming, but few are positioned to take advantage of it.

Why? Because no one can afford to be wrong..."no one can afford another 10% down month," as one analyst said.

What would a rally look like? We already had one! From the November 20th bottom to the close on December 31, we went from roughly 750 in the S&P 500 to 900...a 20 percent rally.

And it all faded. So now we are due for another rally...under this scenario, we are primed to go from, say, 670 to 800...another 20 percent rally.

Problem is, after seeing what happened during the November-December rally, it's not clear if that rally will be the bottom. Certainly a lot of traders don't believe it will stick.

As for this week...isn't the selling exhausted? Well...look at the stats. TrimTabs estimates there was $30 BILLION in mutual fund withdrawals for the week ending the Wednesday. Retail investors are clearly still selling. Institutional funds (pension funds) are probably standing pat for the moment.

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Questions? Comments? tradertalk@cnbc.com

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

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