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Top Traders: Market Paradox Can't Sustain Much Longer

Wednesday, 22 Sep 2010 | 5:45 PM ET

Stocks slipped on Wednesday, ending the Dow's five-day winning streak, as uncertainty again gripped Wall Street and threatened to derail the rally.

Investors couldn't agree what commentary from the Fed actually meant, when they said inflation was too low.

Some investors found it bullish, speculating the central bank was edging closer to pumping hundreds of billions of new dollars into the economy.

However, others found it bearish, reasoning it meant the economy was in much worse shape than people think.

"The Fed's comments were a double-edged sword. On one hand, they're concerned about the economy, but on the other hand they might do something stimulative. Stocks could go either way," says Thomas Villalta, portfolio manager for Jones Villalta Asset Management in a Reuters interview.

How should you position now?

We’re almost looking at a paradox, says Karen Finerman. The Fed wants to engineer inflation and yet we have a robust bond market. I don’t think those two things can co-exist like that for any period of time. Something’s got to give.

Also, the Fed outlook was not very encouraging, reminds Joe Terranova. That makes me question how resilient earnings are going to be during the next earnings season. We may not see a continued appreciation in the overall equities market.

However, if we’re looking at more inflation I’d want to rotate some capital out of gold and get ample exposure to energy and ag, Terranova counsels.

Out of all the moves on Wednesday I think what happened in the gold market is particularly important, says Brian Kelly. It hit new highs. It seems all commodities that are dollar based are moving higher. These inflation expectations are a big change in the market even from a week ago. All the action suggests investors expect the dollar is going much, much lower.

Remember, gold is a great trade when it’s going higher but when it reverses look out below, reminds Guy Adami. I'm fearful of that day.

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MARKET BUZZKILL: FINANCIALS

Financials struggled on Wednesday after Deutsche Bank cut estimates on Goldman Sachs and Morgan Stanley . Also Jefferies reported weaker than expected results. The common thread here was a miserable slowdown in financials, explains host Melissa Lee.

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

What’s the trade?

Bank of America is laying off, says Karen Finerman. That says they have too much capacity and not enough business. It’s hard for me to feel optimistic about what we’re going to see from banks this quarter. However, I still hold BofA and JPMorgan because I think they’re both dirt cheap.

I suspect we’re looking at much lower trading volumes for a much longer period of time, adds Guy Adami. It's a structural change. There are going to be fewer hedge funds in the world and they will be trading less.

In the space I’m long Goldman, reveals Joe Terranova, although technically it did not have a good day. It traded below the 200-day and 50-day. I’d now make $141 my line in the sand.

I'm short Piper Jaffray, Stifel and KBW, says top trader Stephen Weiss author of "The Billion Dollar Mistake". Those firms are not geared for algo-trading.

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TOPPING THE TAPE: GOLD

Although stocks traded lower, the commodity trade ramped into high gear with gold settling at new record highs, just $10 shy of that key $1300 level; also silver and copper surged as well.

How should you position?

If you believe in gold, look at the gold miners, says Joe Terranova. However I think the price of gold could face headwinds soon, as miners start to hedge.

It seems to me that there’s concern about gold having a correction, counters strategic investor Bill Fleckenstein, but most people don’t own gold. I think the trend will be more and more investors rotating into gold as currencies devalue. I suspect the gold bull market will go on for quite some time. It probably goes parabolic before it ends, although I don’t think that's anytime soon.

If you’re looking for a metals trade, I’d look at Silver Wheaton, says Guy Adami.

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TOPPING THE TAPE: APPLE

The traders are also keeping an eye on Apple , which again hit a new all time high. Other stocks in the Apple ecosphere, such as AT&T also are performing well.

What’s the trade?

At $300 I’d think about taking some profits, counsels Karen Finerman.

My concern about Apple is the next catalyst, says Brian Kelly. We know the iPad will probably be a hot holiday gift this year-- but then what?

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AFTER HOURS ACTION: RED HAT

Shares of Red Hat climbed in extended trade after the company beat Wall Street forecasts as sales of its software rose sharply.

The world's biggest provider of Linux software, whose rivals for corporate customers include Novell and Microsoft reported profit of $23.7 million, or 12 cents per share. That compared with $28.9 million, or 15 cents per share, in the year-ago quarter when Red Hat recorded a one-time $7.3 million tax gain.

What’s the trade?

The knock against this stock is valuations, says Guy Adami. However if you believe in the tape then Red Hat should trade higher.

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MARKET BUZZKILL: ADOBE

Shares of Adobe plunged in heavy trading Wednesday after the software maker posted a weaker-than-expected revenue outlook for its fiscal fourth quarter.

Although the company, which is behind such software as Photoshop and Illustrator, reported a stronger-than-expected third quarter, outlook was disappointing -- largely due to weakness in Japan and in the U.S. education market.

Is the sharp pullback a buying opportunity? Or should you run for the hills?

Don’t make a move until you hear from Robert Breza of RBC Capital. Watch the video now!

Market Buzzkill
Adobe shares lose a fifth of their value. A look at where the stock is headed, with Robert Breza, RBC Capital analyst.



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Trader disclosure: On Sept. 22th, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Terranova Owns (APA), (AAPL), (ARUN), (BMO), (C), (GS), (IBM), (HES), (JOYG), (XBI), (NBR), (NOV), (OXY), (ORCL), (PEP), (POT), (RSH), (SLB), (SU), (SPLS), (RIG), (UPL), (MA), (VRTS); Adami owns (AGU), (BTU), (NUE), (C), (GS), (INTC), (MSFT); Adami’s wife works at Merck; Finerman owns (AAPL); Finerman’s firm owns (BKS); Finerman and Finerman’s firm owns (BAC); Finerman and Finerman’s firm owns (JPM); Weiss owns (AU), (UXG), (NIHD), (SF), (PJC), (KBW), (QCOM), (AGU), (BAC), (POT), (VZ)

Brian Kelly
Accounts managed by Kanundrum Capital own (GLD)
Accounts managed by Kanundrum Capital own (GDXJ)
Accounts managed by Kanundrum Capital own (SLV)
Accounts managed by Kanundrum Capital own (ORI)
Accounts managed by Kanundrum Capital own (RGR)
Accounts managed by Kanundrum Capital own U.S. Dollars
Accounts managed by Kanundrum Capital own (TIP)
Accounts managed by Kanundrum Capital own (POT) calls
Accounts managed by Kanundrum Capital own Swiss Francs
Accounts managed by Kanundrum Capital are short (BCS)
Accounts managed by Kanundrum Capital are short (IAI)
Accounts managed by Kanundrum Capital are short (XLF)
Accounts managed by Kanundrum Capital are short Mexican Peso
Accounts managed by Kanundrum Capital are short U.K. Pound
Accounts managed by Kanundrum Capital are short (HYG)
Accounts managed by Kanundrum Capital are short (STT)

For Joe Terranova
Terranova is chief market strategist of Virtus Investment Partners, LTD.
Virtus Investment Partners own more than 1% of (ABAX)
Virtus Investment Partners own more than 1% of (ALK)
Virtus Investment Partners own more than 1% of (AMKR)
Virtus Investment Partners own more than 1% of (CASS)
Virtus Investment Partners own more than 1% of (CSVI)
Virtus Investment Partners own more than 1% of (IGE)
Virtus Investment Partners own more than 1% of (LDR)
Virtus Investment Partners own more than 1% of (LPHI)
Virtus Investment Partners own more than 1% of (MGRC)
Virtus Investment Partners own more than 1% of (NRCI)
Virtus Investment Partners own more than 1% of (DBV)
Virtus Investment Partners own more than 1% of (XLB)
Virtus Investment Partners own more than 1% of (XLP)
Virtus Investment Partners own more than 1% of (XLY)
Virtus Investment Partners own more than 1% of (XLF)
Virtus Investment Partners own more than 1% of (XLI)
Virtus Investment Partners own more than 1% of (XLU)
Virtus Investment Partners own more than 1% of (SUBK)
Virtus Investment Partners own more than 1% of (WDFC)
Virtus Investment Partners own more than 1% of (YDNT)
Virtus Investment Partners own more than 1% of (DLUEY)
Virtus Investment Partners own more than 1% of (DRYS)

For Bill Fleckenstein
Fleckenstein owns Gold
Fleckenstein owns Silver

For Eric Jackson
Jackson owns (MSFT)
Jackson is short (RIMM)
Jackson owns (AAPL)
Jackson owns (GOOG)

For Mike Khouw
Cantor Fitzgerald makes a market in (ADBE)

For Robert Breza
***No Disclosures***

For Barry Ritholtz
***No Disclosures***

CNBC.com and wires

  Price   Change %Change
DJIA
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ADBE
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BAC
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DBA
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GD
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GS
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JEF
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JPM MLP ETN
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KBW
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MS
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PJC
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RHT
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SF
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SLW
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T
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SPDR NRG SEL
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SPDR FIN SEL
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AAPL
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  • Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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  • Guy Adami is a contributor on CNBC's "Fast Money." He also is managing director of stockMONSTER.com.

  • Najarian, the "Pit Boss," is cofounder of optionMONSTER.com, a news site for options traders.

  • Finerman is president of Metropolitan Capital Advisors, Inc., a company she co-founded.

  • Founder of EmergingMoney.com

  • Chief Market Strategist for Virtus Investment Partners & CNBC Contributor

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