Both the Dow and S&P closed lower on Monday for a second straight session as investors ditched natural resource names after commodity shares succumbed to pressure from the higher U.S. dollar.
Adding to the negative tone, an economic research firm, ISI Group, said in a note there could be an agreement to phase out the home buyer tax credit over 13 months, rather than expand it, as some had hoped. As a result, investors sold home builders and banks.
Trading was choppy with stocks initially starting on firmer footing. However, after the Dow climbed by 100 points a strong intra-day reversal sent the market tumbling with the Dow ultimately closing about 100 points lower.
What’s the trade?
Strategy Session with the Fast Money traders
The big reversal was really noteworthy, says Guy Adami. Monday's market performance was not bullish by any means. Personally, I think the dollar continues to get stronger and we lose the commodities rally. Then it gets messy.
There was a critical failure on the S&P at 1100, adds Joe Terranova. That’s the market ‘tell.'
You’d think the stronger dollar would be bullish, muses Tim Seymour, as a sign of recovery. But in the near-term it also signals stimulus coming out of the market and that scares investors.
HIGHER RATES THE REAL FEAR?
U.S. Treasury debt prices fell on Monday amid worries about the impact of this week's record $123 billion in bond supply and that the Federal Reserve is paving the way to raise interest rates sooner than expected.
This week's supply wave kicks off with a $7 billion reopening of five-year Treasury Inflation-Protected Securities (TIPS). In addition to the five-year TIPS auction, the Treasury will sell $29 billion in three-month bills and $30 billion in six-month bills.
After Monday's debt sales, the Treasury will sell $44 billion in two-year notes on Tuesday; $41 billion in five-year debt on Wednesday and $31 billion worth of seven-year notes on Thursday.
What’s the trade?
I’m seeing a lot of bullish activity in the TBT , says Pete Najarian.
The TBT could go to $50, adds Guy Adami.
CITI, B OF A LEAD MARKET LOWER
BofA and Citi led the financials lower after new reports out of Washington suggest things may be about to change for large financial firms that need government help to stay afloat.
Specifically, CNBC has learned that the administration is urging Congress to adopt new regulations which make it far more likely that equity holders and creditors sustain losses in cases where the government intervenes to deal with a failing firm.
Adding to the negative tailwind, the WSJ reported “BofA’s attempt to repay federal bailout funds and escape the government's grasp has been snagged by a disagreement over how much additional capital the bank must raise to satisfy regulators.”
What’s the bank trade?
There’s a huge divide between investment banks and consumer oriented banks, muses Joe Terranova. That means Goldman , Morgan and other banks that have strong trading units are still poised to turn profits but the big money center banks such as BofA are in a different class and the profit potential doesn't look nearly as attractive.
If you’re looking for a trade, I’d look at Wells Fargo and BofA from the short-side, says Guy Adami.
The technicals in the XLF and the BKX look terrible, adds Tim Seymour. We broke some fairly important levels and that’s an important and bearish technical signal.
CASH FOR CUL-DE-SACS
As we mentioned above, economic research firm, ISI Group, said in a note that lawmakers were planning to phase out the first time home buyer tax credit.
However, later in the day Sen. Bill Nelson (F-FL) suggested that the U.S. Senate will likely act later this week to extend the $8,000 tax credit.
"We should be able to extend that later this week," Nelson, a member of the Senate Finance Committee, told reporters before joining President Barack Obama on an Air Force One flight to Florida.
What’s the trade?
I think what they’re both saying is that the tax credit will be extended in the near-term but then phased out over time, explains Joe Terranova. And personally, I think stimulus is very important for the sector.
It’s also worth noting there’s a growing short interest in homebuilders, adds Melissa Lee.
DOLLAR HITS ENERGY STOCKS
Oil fell more than 2 percent to below $79 a barrel on Monday dragging down big oil names including Exxon and Chevron due to a stronger dollar and concerns that a sluggish economic recovery will keep fuel demand low.
Considering the move, should you buy big energy ahead of earnings?
Earnings Calendar: Oil
Tuesday: BP, VLO
Wednesday: COP, HES
Thursday: XOM, PDE
What’s the trade?
I think that the price of oil has found its near-term top, muses Joe Terranova. But that doesn't mean there isn't a trade to be had in the space. I like long ConocoPhillips for an upside earnings surprise.
My favorite name in the space is BP, adds Pete Najarian.
As much as Apache is my favorite name, I think at current levels it’s a short, adds Guy Adami.
HIGHER RATES, DOLLAR FRIEND OR FOE TO STOCK RALLY?
After touching 14-month lows, has the dollar finally bottomed? What are the traders on the floor telling CNBC’s Rick Santelli. Watch the video now and find out.
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CNBC.com with wires