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Halftime Report: Are Stocks Badly Overbought?

Monday, 17 Aug 2009 | 1:35 PM ET

Both the Dow and S&P 500 fell Monday after a weaker-than-expected outlook from Lowe’s highlighted the fragile state of the consumer and suggested stocks may be overbought.

The move lower here in the U.S. mirrors weakness around the world; the Shanghai stock market tumbled almost 6 percent and the major indexes in Europe fell more than 1.5 percent.

Fast Money Halftime Report
The Fast Money traders weigh in on the markets and share their midday trading advice.

What should you be watching?

Over the last week, in the last 45 minutes buyers stepped in and pushed the market higher, explains Jeff Tomasulo of SMB. I think the key here is to keep an eye on 980 in the S&P. That’s a critical technical level. If the market closes below that level we could see 968 in the SPDRs.

It seems to me stocks have found resistance around 1010 in the S&P, adds Fast Money trader Joe Terranova. I expect the market to trade between 950 and 1010 for a while. Down the road, however, I expect stocks should move higher. But that move might not come until November. When it does I think the leader should be energy. If you’re looking for a trade, I’d get long the entire energy sector – that includes refiners as well as oil services stocks.

Also, keep your eye on the Vix , counsels OptionMonster Jon Najarian, which is spiking. It says to me that fear has increased but it also suggests investors are buying protection which could make them more willing to accept risk.

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BANKS SELLING OFF

Investor sold off bank shares after Bank of America said on Monday credit card defaults inched up in July, as more Americans lost jobs and many continued to struggle to pay their debts.

What’s the trade?

I’m watching Capital One, says Jon Najarian. I’m a buyer but not at current levels.

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CONSUMER & HOUSING SHARES FALL

Consumer and housing shares fell after Lowe’s posted a 19 percent drop in quarterly profit on Monday and forecast current-quarter earnings below Wall Street estimates as consumers put off big home projects.

What’s the trade?

I don’t know that I’d get long Lowe’s or Home Depot, counsels Joe Terranova. I’m just very concerned about the consumer.

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INSURERS, HEALTHCARE HIGHER

The dwindling prospect of a government-run health insurance plan lifted the shares of managed care companies on Monday and relieved investors who feared the companies could not compete with such a plan.

Health and Human Services Secretary Kathleen Sebelius said on Sunday that nonprofit cooperatives could also fulfill the White House goal of creating more competition on insurance. Analysts viewed the co-ops as a far less threatening to managed care companies, even as details on them remain unclear.

"This is the best-case scenario," says David Heupel, a portfolio manager with Thrivent Investment Management. It "takes off the table anything really, really onerous for the group, and that's a huge positive."

What’s the trade?

I’m seeing a lot of at the money and out of the money 'call' buying in Wellpoint , Cigna and UnitedHealth among others, reveals Mike Khouw of Cantor Fitzgerald. That’s bullish options activity.

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CHINA SELL-OFF TAKES GLOBAL MARKETS DOWN

Chinese stocks tumbled 5.8 percent to their lowest close in two months on Monday, posting their biggest daily percentage drop in nine months on worries about added share supply and commodity price declines.

In recent weeks, concerns have mounted that stocks that trade in China have gotten far ahead of themselves.

What’s the trade?

I think the bloom’s off the rose, says Tim Seymour. I’m concerned about bank lending in China. I don’t think it can continue at its current rate. I’d be cautious with the FXI .

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CALL THE CLOSE

Joe Terranova: I expect to see confusion in the marketplace. The next two weeks could be very difficult.

Mike Khouw: I’m waiting to see if the pullback is prolonged.

Jon Najarian: I’m a seller.

Jeff Tomasulo: I’m a seller into the close.


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Trader disclosure: On Aug 17th, 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), (BTU), (C), (GS), (INTC), (MSFT), (NUE); Najarian Owns (BAC); Najarian Owns (BBT) Call Spread; Najarian Owns (C) Calls; Najarian Owns (FCX), Is Short (FCX) Calls, Owns (FCX) Puts; Najarian Owns (HD) September And Is Short (HD) August Calls; Najarian Owns (HPQ) September Calls And Is Short (HPQ) August Calls; Najarian Owns (MS) And Is Short (MS) Calls; Najarian Owns (MSFT) And Is Short (MSFT) Calls; Najarian Owns (UNH) Calls; Najarian Owns (YHOO) Call Spread; Finerman's Firm Owns (BAC) Preferred Shares, Finerman Owns (BAC) Preferred Shares And Owns (BAC); Finerman's Firm Owns (MSFT), (TGT), (WMT), (CTX); Finerman's Firm Owns (WFC) Preferred Shares And Is Short (WFC), Finerman Owns (WFC) Preferred Shares; Finerman's Firm Is Short (IYR), (IJR), (MDY), (SPY), (IWM), (USO), (XRT); Finerman's Firm And Finerman Own (PDE); Seygem Asset Management Is Short (BIDU); Seymour Owns (AAPL); Seymour Owns (BAC); Seygem Asset Management Is Short (FXI)

For Jeff Tomasulo:
Tomasulo Is Short (IBM)
Tomasulo Owns (JPM)

For Pip Coburn:
Coburn's Fund Owns (AAPL), (ANSS), (ADBE), (SY)
Coburn's Fund Is Short (PALM)

CNBC.com with wires

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DJIA
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S&P 500
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BAC
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CI
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COF
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FLEX
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HD
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LOW
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UNH
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VIX
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WLP
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SPDR SP HB
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SPDR NRG SEL
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SPDR FIN SEL
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SPDR CD SEL
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