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Halftime Report: Could Earnings Season Surprise To The Upside?

Both the Dow and S&P 500 were trading lower around lunchtime Wednesday due to anxiety about the health of corporate profits ahead of the second-quarter earnings season.

Investors widely believe that unemployment and a lack of consumer spending could drag down results considerably. “We saw some pretty heinous jobless numbers last week. With employment figures continuing to be bad, you have to think there's very little case to be made for positive consumption," says Craig Phares of Nomura.

How should you be positioned?

Instant Insights with the Fast Money Traders

I think you can look at the market one of two ways, explains Zach Karabell of RiverTwice. The trading side of the market is clearly bias down but the fundamentals are bias up. Although we’ll likely see negative earnings I also expect some better-than expected numbers.

It seems to me investors expected a paradigm shift, muses Brian Schaeffer of VDM Capital, and it’s just not happening. In other words they expected to hear that the write-downs were over and they're not. I’m still a buyer of banks but I’m also careful not to get ahead of myself.

With the market this weak, I’d look at the utilities and the healthcare sector, adds John Kosar of Asbury Research. I’d rotate out of the leaders such as financials and into the sectors I just mentioned.

I’m looking to play stocks that pay dividends adds, Danielle Hughes of Divine Capital. Specifically I like Hatteras Financial and BP .

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OIL KEEPS FALLING

Bearish sentiment pervaded in the energy space after crude oil futures fell to a six-week low. The latest drag stems from new data, which shows refined product inventories rose sharply last week. That in turn means demand is faltering.

Patterns in charts suggest to John Kosar that oil will likely head even lower, perhaps as low as $55. Ever since October 2007, crude and the S&P have traded together, he says. There’s a 76% correlation and with stocks falling oil should too.

I think the x-factor in oil stems from geopolitical issues, adds Brian Schaeffer. If you look at Iran, Iraq and Nigeria you’re looking at countries as stable as most mental patients. Any troubles could sent crude much higher and equities lower.


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TOPPING TAPE: CONSUMER SHARES

Shares of Family Dollar provided a bright spot in an otherwise dreary market with the retailer reporting a 36 percent jump in quarterly profit, topping market estimates, as more shoppers scoured its aisles for low prices on food, shampoo and household cleaners.

Considering the pop in Family Dollar, the trade is likely over, counsels Zach Karabell.

I still like the discount retailers, counters Danielle Hughes. I’d look at Target and Wal-Mart .

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OPTIONS ACTION: ALCOA AFTER THE BELL

Investors are eager to hear quarterly results from Dow component Alcoa, Wednesday after the bell. The company is expected to post its third consecutive quarterly loss after markets close on falling demand for aluminum.

What does the options action reveal?

I'm seeing unusual options action in the July 10 calls, explains Scott Nations. However, I don't interpret the move as a bet higher. Instead I think it's traders taking advantage of falling volatility. In other words, big investors are attempting to profit from premiums because “they’re not real worried that Alcoa is going to move from $9 to $10 in short order.”

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TRADE TO GO: NEW ORIENTAL EDUCATION

There’s an emerging middle class in Asia, explains Zach Karabell, and people want to get ahead. I’d keep an eye on New Oriental Education they provide classes in English as well management classes. In the Chinese culture education is a top priority.

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CALL THE CLOSE

Zach Karabell: I’m a short term seller but a long term buyer.
John Kosar: I’m a seller.
Brian Schaeffer: There’s no reason to buy.
Danielle Hughes: I’m a buyer of the dips.


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Trader disclosure: On July 8th, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Seymour Owns (AA), (AAPL), (BAC), (BX), (EEM), (FXI), (F), (INFY), (SBUX); Seymour's Firm Owns (FCX); Terranova Owns (MSFT), (XBI), (ABT), (OIH), (RIMM), (SUN) ; Adami Owns (AGU), (C), (GS), (INTC), (MSFT), (NUE), (BTU); Finerman Owns (RIG), (TBT); Finerman's Firm Owns (FCN), (MSFT), (NOK), (PBR), (RIG), (TBT), (WMT), (FLS); Finerman's Firm Owns (BAC) Preferred; Finerman Owns (BAC) Preferred; Finerman's Firm Is Short (BAC), (IYR), (IJR), (MDY), (SPY), (USO)

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