Stock market rallies on belief a DC deal is coming

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We are rallying on a belief that there will be a deal. It's that simple.

All day long, on the floor, there have been debates about the rally, as in, "Aren't we getting ahead of ourselves? They're only talking about an extension on the debt ceiling, not even getting the government back open!"

That's true, but it misses the critical point: The market is rallying because it is the debt limit that is the crucial issue. The debt limit is where the default risk lies. The government shutdown—while not desirable—is secondary.

The rally is the market's way of saying that we are finally moving in the right direction, after a week of going the wrong way. The market needs to see signs of a compromise. That's why Janet Yellen didn't give us a boost yesterday, because there was no sign of progress.

As for the rally, it's as broad as you are likely to see in a while. We are close to what technicians call a 90-percent-upside day: 90 percent of the volume is going to stocks on the upside, and almost 90 percent of the stocks at the NYSE are trading up.

Throw a rock anywhere on the floor of the NYSE and you will hit stocks up 1.5 percent to 2 percent. Big caps, mid-caps, small caps. Financials, industrials, materials, consumer discretionary. International ETFs in India, Russia, Thailand, Chile, Brazil. All up.

And all those high-beta stocks that sold off in the last few days? All up big. Biotech. Chinese Internet. Facebook, Netflix, Green Mountain, Tesla, LinkedIn.

Why did those high-beta names sell off so much? Because that's where the profits were for the hedge funds! This year, Tesla is up 410 percent, Netflix 228 percent, LinkedIn 97 percent, Facebook 84 percent, Green Mountain 62 percent.

You think anyone is going to mess with those kind of earnings?

Faced with a threat to those profits, hedge funds "degrossed," i.e., they took down their positions. They sold longs and covered shorts.

And they sold a lot of their longs. Facebook, for example, started up yesterday and within an hour had dropped about five percent on 40 million shares. ... It normally trades 70 million a day! That's selling!

And the other side of the coin happened as well: Many covered shorts. Many were short consumer names. Look at the Consumer Staples ETF (XLP). It wasn't down at all this week.

As for Friday, the Senate probably will not vote on anything until Saturday, so unless everything falls apart not much bad will happen, and we probably get a continuation day.

One note: JPMorgan (JPM) and Wells Fargo (WFC) earnings could affect financials. Both banks report Friday morning.

By CNBC's Bob Pisani