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A Broad Rally

While the S&P 500 is up 3.8 percent this week, the S&P 500 equal-weighted index, which gives each of the 500 stocks an equal weighting, is up 4.7 percent this week. In other words, this has been a fairly broad rally, with lots of stocks participating in the rally.

That means traders have lots of gains on the table: the S&P 500 has now retraced more than half its losses from mid-September of last year.

How many shorts are left? There's plenty of skepticism from traders about the durability of this rally, but the idea that there is "oceans of cash on the sidelines" is certainly questionable. Not only is trader activity up, but mutual fund flows have been stronger recently as well.

It's not so much shorts, it's guys who are underinvested in the markets. This is big money that needs to catch up on performance.

Most traders believe that there is real money, not just shorts, that have moved the markets up.

Elsewhere, many companies continue to beat on the bottomline due to cost cutting, but topline remains light: Microsoft, Amazon, Ingersoll Rand, AmEx, are examples this morning.

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1) Black & Decker up 4 percent after Q2 earnings handily beat estimates despite a steep 27 percent drop in revenues. Q2 demand "remained extremely weak," but margins were boosted by a significant reduction in costs. Guidance for the second half is mixed: Q3 earnings guidance is disappointing (35-45 cents vs. 52 cents est.), but the company raises full-year guidance to $1.65-$2.00 vs. $1.60 est.

The reason: CEO Nolan Archibald cautions the toolmaker expects "a sales decline in the third quarter similar to the first half," although fourth quarter sales declines should improve.

2) Shares of industrial giant Ingersoll-Rand rise 5 percent after earnings were well above estimates (50 cents vs. 39 cents est.), largely on cost cutting. Revenues rose 13 percent, but were at the "low end of (our) guidance" as volumes were weak.

Although it continues to expect "reduced (year-over-year) activity levels" from its customers, the company raises full-year earnings guidance to $1.50-$1.80, topping the street's forecast of $1.32. Revenue guidance for the year also is above expectations.

3) American Express but revenues were short, as the company was hurt by weakness in card member spending, and credit losses.

4) Oil service firm Schlumberger (SLB) down 2 percent pre-open despite beating estimates on the top and bottom lines. Conditions stabilized a bit, but that was primarily due to "slowing rates of decline and some recovery" outside North America. Demand in the U.S and Canada was still very weak and the company doesn't see a rebound until next year as customers will likely not "sanction any major increases in expenditures."

5) Citigroup exchange offer expires today. In the first part of its exchange offer, Citi, according to KBW, will issue up to 5.9 billion shares of common stock in exchange for all publicly held Preferred Depository Shares and certain Trust Preferred Securities. This exchange is set to expire at 5 p.m. today.

There will be a second exchange offer, this one for the U.S. government and certain private holders, that will also be completed by September 2009.

This exchange has been a mess for arb investors. Typically arbs buy the preferreds, and short stock. But the stock became hard to borrow some time ago. Normally, traders get a rebate (an interest payment) for stocks that they short; but in this case traders had to PAY to borrow the stock, which killed the arb position.

Result: a lot of arbs lost money, and some lost their jobs.

The incentive to exchange preferreds for common is that Citi has said they will not be paying dividends on the preferreds, which eventually will be delisted.

Here's the problem: although the preferreds are still trading, anyone who buys them now will likely not be able to participate in the exchange because the offer expires today, and buyers today will not be able to settle before the standard 3-day settlement time.

Do buyers of Citi's preferreds understand this? It's not clear that everyone does.

Barron's provides a fuller explanation of this mess.

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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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