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Halftime Report: Ride The Resilient Rally?

RIDING A RESILIENT RALLY

Both the Dow and S&P 500 were trading modestly higher around lunchtime on Wednesday with gains largely fueled by positive broker comments on McDonald's and Procter & Gamble .

Meanwhile, the Vix, the stock market's main volatility gauge continued to decline on Wednesday, fueling optimism that the recent rally had further to go.

With trillions still sitting on the sidelines is there a real resiliency in stocks? Or are gains being driven by irrational exuberance?

Instant Insights from the Fast Money Traders

The Vix tells us about the implied volatility moving forward for 30 days in the S&P, explains Jared Levy of Peak6 Investments. There’s a ton of complacency yet the Vix is telling us the Dow could have a variation of about 150 points per day, two thirds of the time. And almost nobody is buying downside puts – or protection in this rally – and that makes me nervous. There’s a feeling of uber-positivity.

I’d take the other side of that argument, counters Fast Money trader Joe Terranova. It seems to me there’s a real resiliency in stocks. If you’re a money manager you’re not thinking about downside protection – you’re thinking about chasing performance on the upside. Keep in mind there’s trillions sitting on the sidelines and money managers need to put that to work.

I think investors can take advantage of both scenarios, adds OptionMonster Jon Najarian. With volatility getting sucked out, it’s great for investors who overwrite -- people who own the assets and say on this run I want to sell calls against it. That’s what I’ve been doing.

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BEARISHNESS AT 2-YEAR LOW

A chart of the S&P 500 vs. Rydex Inverse S&P 500 Fund 2007-2009 shows the market is at its "least bearish" levels in 2 years.

In other words investors are the least negative on the stock market that they’ve been in two years, explains John Kosar of Asbury Research. Investors are thinking about playing offense and not defensive. But historically that’s when we’ve peaked.

I think the trade is – if you have profits in this market you should keep them – I’d move stops up and lock in some profits, Kosar counsels.

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COMMODITIES HIGHER, OIL BREAKS $60

U.S. crude oil futures pushed above $61 a barrel on Wednesday on a weaker dollar, Nigerian unrest, strength in equities and Tuesday's bullish oil inventory report from the American Petroleum Institute.

Oil looks like it will sustain above $60, muses Joe Terranova. I’m long oil futures and Hess .

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BANK OF AMERICA HIGHER DESPITE STOCK SALE

Again, both the S&P 500 and Dow are climbing after a big bank announces a stock sale. This time the secondary comes from Bank of America.

As Fast Money first told you yesterday the North Carolina based bank has sold 800 million shares at $10 each; the move marks a major step toward meeting the U.S. government's requirements for capital-raising following the recent "stress testing" of the bank.

The offering by Bank of America comes on the heels of smaller share issuances by other banks ordered to raise capital. This includes offerings of $8.6 billion by Wells Fargo and $4 billion by Morgan Stanley .

I’m seeing BAC straddles and strangles selling, says Jared Levy – ( that is, bets that stock will stay between 9.50 and roughly 15 by July expiration.)

It seems to me Bank of America runs into resistance at $12, adds Jon Najarian. And in the space, I’m seeing heavy options actions in Jefferies on takeover rumors. I don’t think it gets taken over but I do think the stock goes higher.

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TARGET BEATS

Target reported a better-than-expected quarterly profit on Wednesday, as the No 2 U.S. discount retailer offset sluggish sales by keeping a tight control on inventory and expenses, while its credit card business was profitable.

The results come as Target has increased its focus on food and pharmacy items, and the "Pay Less" side of its "Expect More. Pay Less" tagline to draw in shoppers, who are no longer splurging on its high profit-margin trendy clothes and home decor.

If you’re long Target I’d take some off the table, but longer-term I think the stock remains a buy, says Joe Terranova.

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MCDONALD'S GETS AN UPGRADE TO 'BUY' AT DEUTSCHE BANK

An appealing stock price and the expansion of its espresso-based coffee drinks led a Deutsche Bank analyst to raise the rating of McDonald's to "Buy" from "Hold" on Wednesday.

I think the coffee brings people into the stores and people will buy other things, muses Pete Najarian. I’m impressed.


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Trader disclosure: On May 20th, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders;

Najarian Owns (GME)

Terranova Owns (XOM)
Terranova Owns (HES)
Terranova Owns (BP)



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