Playing Bank of America's Hedge Fund Bounce

Wednesday, 12 Aug 2009 | 6:11 PM ET

The markets passed the halfway point of the week recouping the losses it experienced two days prior. Although the markets closed off their highs, the Dow, Nasdaq and S&P 500 all finished up over 1%.

After today's Fed's decision left rates unchanged and suggested that the economy was leveling out, the market seemed to regain some of its momentum. All this upward action has traders wondering, have we gone too far, too fast? The Fast Money traders are giving you their take.

Word on the Street
The Fast Money traders take a look at today's top business stories.

Word On The Street

Today's markets faced a broad-based rally even after the Fed decision was to maintain the status quo, which was good news for the market. If you're bearish in this market, you're waiting for a possible correction, says Joe Terranova, who sees a large number of investors who are still on the sidelines.

"I still think that we're going lower, and it's really hard to have that view right now," says Guy Adami, predicting the next big move on the S&P to be 50 points do the downside.

Karen Finerman agrees, saying she "Can't get wildly bullish here," explaining that there has been a divergence between the recovery in the stock market and the general economy: economic good news has already been priced in. "Today really came down to volatility," says Pete Najarian, pointing out that the VIX has been hovering around 25. He has also seen big options action, with put-to-call ratio at 2:1, which essentially means that protection is being put in place and people aren't having to "panic out," he says. Najarian adds that this sort of ratio doesn't normally make sense on an up day.

Financials Leading The Rally

Yesterday the financials were dragging the market down, and today the sector was one of the most lucrative movers. Names like JPMorgan, Citigroup and Goldman Sachs experiencing multiple percentage point upswings and ended the day with the positive news that Hedge Fund titan John Paulson bought up 168 million Bank of America shares.

Breaking News: BAC
John Paulson's Fund buys $2.7B stake in Bank of America, reports CNBC's Charlie Gasparino.

"This is a huge turnaround story," says Karen Finerman, "Everything went wrong here... and then everything started to turn. The potential profitability here is enormous. I like Bank of America, I think we're early in the turnaround story." Finerman herself is long both BAC common shares and preferred shares, and notes that Paulson's move gives a large vote of confidence.

"The financial sector will still have the steep yield curve working in their favor," says Joe Terranova, "the capital markets are clearly improving right now... I think everything lines up well in the financial sector for a potential return to normalized earnings. Now that Bank of America is back on the rise, keep in mind that mutual funds are under-invested in this name."

After the Bank of America news, what other names are likely to rise? Karen Finerman suggests Wells Fargo, noting that it is also a big bank and has acted very similar to BAC throughout the crisis.

Guy Adami sees the best plays being the downstream plays like Piper Jaffray, Raymond James and Jefferies are the names he likes. Pete Najarian suggests keeping an eye on regional banks if the commercial industry begins on the mend.

However, Karen Finerman reminds people that you have to keep in mind that investors don't see the other side of these big hedge fund portfolios and Paulson's holdings are as of June 30th, so Bank of America stock has moved since then.

Topping The Tape: Homebuilders

In the home building sector , the big mover is Toll Brothers whose stock rose 14% after net contracts increased for the first time in 4 years, which stunned analysts that predicted a double-digit decline. "The most interesting thing about Toll Brothers is that the cancellation rate was 8%, compared to 21.7% last quarter," said Guy Adami, who thinks although the news is encouraging, he'd rather buy Home Depot, which is approaching its 52-week high.

Is the Fed Being Too Accommodating?

After the Fed's announcement today that it will leave interest rates near zero today, it also suggested that the economy is on more stable ground and that inflation points to the fact that economic activity is leveling out. Is it possible that the Fed could be leaving interest rates too low for too long?

CNBC's Rick Santelli thinks that easy money lent out by Bernanke may be in place for too long, eventually hurting the economy. To hear his points on this subject, Bernanke's future and the Fast Money traders' opinions, check back for the video!

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Trader disclosure: On Aug. 12th, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders: Adami Owns (AGU), (C), (GS), (INTC), (MSFT), (NUE), (BTU); Najarian Owns (BUCY) And Is Short (BUCY) Calls, Owns (FCX) And (FCX) Puts, Owns (INTC) Call Spread, Owns (MSFT) & Short (MSFT) Calls, Owns (MS) And Is Short (MS) Calls, Owns (MOS) Calls, Owns (PALM) Call Spread, Owns (WMT) Calls, Owns (YHOO) Call Spread; Finerman's Firm Is Short (USO), (IJR), (IYR), (IWM), (MDY), (SPY), Finerman's Firm And Finerman Own (BAC) Preferred Shares, Finerman's Firm Owns (MSFT), (NOK), (PBR), (RIG), (TBT), (WMT) Finerman Owns (RIG), Finerman's Firm And Finerman Own (WFC) Preferred Shares, Finerman's Firm Is Short (WFC); Terranova Owns (AMZN), (MSFT), (POT) Puts, Terranova Works For (VRTS)

Terranova Is Chief Market Strategist Of Virtus Investment Partners, Ltd.
Terranova Is Co-Portfolio Manager Of The Virtus Diversifier PHOLIO
Virtus Diversifier PHOLIO Owns (IGE)
Virtus Diversifier PHOLIO Owns (DBC)
Virtus Diversifier PHOLIO Owns (DBV)

Virtus Investment Partners Owns More Than 1% Of (ABD)
Virtus Investment Partners Owns More Than 1% Of (CAL)
Virtus Investment Partners Owns More Than 1% Of (DLR)
Virtus Investment Partners Owns More Than 1% Of (EXR)
Virtus Investment Partners Owns More Than 1% Of (IGE)
Virtus Investment Partners Owns More Than 1% Of (DBC)
Virtus Investment Partners Owns More Than 1% Of (DBV)
Virtus Investment Partners Owns More Than 1% Of (SKT)
Virtus Investment Partners Owns More Than 1% Of (TNB)
Virtus Investment Partners Owns More Than 1% Of (UA)
Virtus Investment Partners Owns More Than 1% Of (CLB)

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  • Chief Market Strategist for Virtus Investment Partners & CNBC Contributor

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