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Intra-Day Reversal Capitulation Signal, Probably Not

Tuesday, 25 May 2010 | 5:39 PM ET

While most investors were caught off guard by the sudden and sharp downturn a handful of others saw it coming.

John Tabacco of Locatestock.com was among that smaller and elite group. Tabacco runs a firm that finds stocks hedge funds are looking to short.

As you might remember just last month he warned that a sharp downdraft in the market was ahead, largely because his clients were doubling down especially in the financials.

Market Held by Pins and Needles
U.S. and global banks are still highly overvalued. Insight with John Tabacco, LocateStock.com CEO.

But considering the market has now whooshed lower, chatter is growing that Tuesday's action may have been capitulation - in other words some market pundits think the selling reached its climax and now it's over.

Was Tuesday’s action capitulation or was it just a pause on the march lower?

According to Tabacco the smart money is betting the decline resumes.

"I didn't see significant short covering on Tuesday (by hedge funds)," says Tabacco on Fast Money. "Short sellers still think the US banks along with overseas banks are still highly overvalued."

In fact Tabacco is seeing signs that the smart money is growing more bearish.

"We're seeing more short sellers not being net-flat at the end of the day but holding those short positions overnight. They're willing to take on more risk to profit if stocks gap lower in the morning."

But Tabacco doesn't just talk in abstracts. He's willing to name names.

Following are favorites among the shorts, according to LocateStock.com.

Banco Santander
ING
Citrigroup
MBIA Ambac
JPMoragn

And it's not just Tabacco who's looking for further declines.

Battle the Bear
A look at how hedge funds are dealing with this crisis after so many went under in 2007, with Anthony Scaramucci, Skybridge Capital.

So is Anthony Scaramuuci of Skybridge. "As far as I can tell most money mangers are looking for another 5-10% decline on the S&P," Scaramucci says.

"Most hedge funds are in a defensive position," he adds. "Or they're on the sidelines."

What's the bottom line?

Hedge fund interest in shorting these stocks suggests the market could still turn down, and turn down sharply, Tabacco concludes.



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Trader disclosure: On May 25, 2010, 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); Terranova Owns (FTO), (IPSU), (RSX), (PFE), (STLD), (TER), (YHOO), (AXP), (BMO), (BBY), (DIS), (XCO), (BTU), (SWN), (GLD); Terranova Owns Gold; Cortes Owns (FCX), (FXI), (GS); Scott Nations Is Long (SPY); Edwards Owns (VXX); Tomasulo owns VIX calls; Tomasulo owns (VXX); Tomasulo owns (PCLN) calls; Tomasulo owns (V) calls; Tomasulo owns Gold spot futures; Tomasulo owns Euros

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