What's behind Thursday's stock rally

Traders on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters

Why the rally? Traders were surprised by the strength of the rally Thursday morning, which mostly occurred in the first 20 minutes of trading.

There are several factors:

1) A modest reversal in the dollar's strength, which caused traders to buy the U.S. market and sell Europe.

2) Weak February retail sales were plausibly blamed on weak weather, and traders took cheer in the fact that Internet sales were up 2.2 percent month-over-month and 8.6 percent year-over-year.

But all this was known well before the markets opened. The strong rally right at the bell ringing—almost all our gains were accomplished in the first 20 minutes—suggest there were other factors.

The most obvious explanation is that we were simply oversold and traders needed to cover short positions or felt the need to buy.

Indeed, one of the reports most widely passed around on trading desks this morning was from Evercore ISI, which noted that their Hedge Fund Survey showed that net exposure to the market was at its lowest reading since last October. This is historically a good contrary indicator for the market. In other words, when hedge funds have unusually low exposure, the market often rallies.

On Wednesday, Morgan Stanley noted that Global funds had added to short positions for 15 straight days.

Another healthy sign for stocks: West Texas Intermediate (WTI) is down 2.2 percent, at its lowest level in six weeks, and while the energy sector is down, it is not taking the market down with it.