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"Much Less Bad" - The New Standard

As we get better economic news, stocks set the bar higher. I noted this morning that "less bad" was no longer good enough to move stocks forward, the new standard is "much less bad," and even that may not last long.

"Much less bad" is what we got with the ADP report this morning, yet traders sold right into the rally.

Warning!

Stocks have rallied midday on various reports that MetLife, Goldman Sachs, JP Morgan, Morgan Stanley, American Express and Bank of New York do not need to raise capital, while Regions Financial, Citigroup, and Bank of America do.

Bottom line: less dilution than was anticipated. Again, the "much less bad" scenario.

So financials are providing the market leadership today and since the rally began; it is no coincidence that financials were the group most heavily sold in the beginning of the year.

What about the other most heavily shorted group-retail?

Next up to test the "much less bad" scenario: April retail sales and nonfarm payrolls.

The S&P 500 is up 35 percent since the March 9th bottom, but retail stocks have rallied 50 percent. This is a clear sign that traders are anticipating retail sales not just bottoming--but showing some signs of an uptick--in the next few months.

The current take on April retail sales: the month started off strong, and tailed off a bit toward the end.

Remember this is the anniversary of the stimulus that began last year, so comps will be getting tougher.

Several companies-like JC Penney, Aeropostale, Gymboree, American Eagle, Hot Topic--did raise guidance last month. This limits the number of companies that can raise guidance.

Sentiment has changed, bulls argue: there is now an underlying bid to retail.

The bull case for retail: cost cutting, lower inventories, and government stimulus will continue to boost sales.

This was one of the most heavily shorted groups; 6 months ago everyone was aggressively taking down earnings estimates.

Now they are realizing they took estimates down too much; that's what's behind the retail rally.

Unlike financials, retailers are down today, and may drop on in-line news tomorrow.

But most retail stock traders tell me they view this as an opportunity to pick up stocks on a pullback. That kind of talk drives shorts crazy.

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WEMMX
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NOVU
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SC0Y
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GS
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HOTT
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JCP
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MET
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RF
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Questions? Comments? tradertalk@cnbc.com

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HT3
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ARO
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JCP
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C
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RF
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BK
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MS
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JPM MLP ETN
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GS
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MET
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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

Wall Street