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Halftime: Key Reversals 'Sell' Signal For Resources?

Perplexing market action on Tuesday’s left investors trying to determine if the rally was out of steam or just taking a pause.

Stocks sold-off in the morning but later pared losses with beleaguered bank stocks including market bellwether Goldman Sachs leading the charge.

However, Street favorites such as Freeport -- as well as the materials names broadly -- were the worst performers in the S&P after China said it will raise its benchmark one-year lending and deposit rate by 25 basis points, effective Wednesday.

"The rally has shown a lot of resilience, and this is an interesting test of people's conviction," says Eric Kuby, chief investment officer at North Star Investment in a Reuters interview.

What should you be watching? How should you position now?

Instant Insights with the Fast Money traders

Tuesday was reversal day, Steve Cortes. What I mean by that is things that were working in September and most of October – things like energy and gold -- were not working on Tuesday; that’s telling.

It says to me the world has been putting a lot faith in China and its ability to engineer a soft landing. I do not share that enthusiasm. I’m bearish on the China trade and a seller of resources.

I don’t think that the rate increase in China signifies anything, says Zach Karabell. Use iron ore as a ‘tell’. Supplies are tight which suggests the build out in China continues. I’d look at the pullback in Thompson Creek as an opportunity.

If you’re looking for a ‘tell’ look at crude , counters Steve Cortes. Oil tested its August high several times and failed. Unless it can get above it’s August highs and confirm the S&P rally - it tells me demand from China is not there.

The rate rise in China was probably more political than economic, muses Brian Kelly. There’s a G20 meeting coming and I think they want to say ‘look what we’re doing.’ But I don’t think the commodity trade is over by a long shot. I’m a buyer of commodities particularly the softs.

Also the dollar was oversold and commodities were overbought, adds Patty Edwards. I also think that triggered moves in Tuesday’s market. However, I view the pullback as healthy. I don’t think the commodities trade is over.

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CHART OF THE DAY: GOLDMAN

The traders are keeping a close eye on financials especially bellwether Goldman Sachs after better than expected earnings sent shares marching toward the key $160 level.

What’s the trade?

I think the pure brokers that don’t have mortgage risk are very attractive, says Steve Cortes.

I expect we see investors chasing performance and that should increase volumes, says Brian Kelly. That should be good for Goldman. I also like Jefferies.



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Trader disclosure: On Oct.19, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Cortes is short oil; Cortes is short gold; Cortes is short the Euro; Cortes is short (RSX); Cortes owns the S&P 500; Karabell owns (AAPL), (C), (GS)

For Zach Karabell:
River Twice Capital owns (GS)
River Twice Capital owns (IBM)
River Twice Capital is short (QQQQ)
River Twice Capital is short (SPY)
River Twice Capital is short (XLK)
River Twice Capital is short (XLF)

For Patty Edwards
Edwards owns (MEE) for clients
Edwards owns (GLD) for clients
Edwards owns (SLV) for clients
Edwards owns (AAPL) for clients
Edwards owns (BAC) for clients
Edwards owns (MS) for clients
Edwards owns (JNJ) for clients
Edwards owns (KO) for clients
Edwards owns (PCL) for clients

For Brian Kelly
Accounts managed by Kanundrum Capital own (GLD)
Accounts managed by Kanundrum Capital own (GDXJ)
Accounts managed by Kanundrum Capital own (TIP)
Accounts managed by Kanundrum Capital own (SLV)
Accounts managed by Kanundrum Capital own (REE)
Accounts managed by Kanundrum Capital own (MCP)
Accounts managed by Kanundrum Capital own (JEF)
Accounts managed by Kanundrum Capital own (UUP)
Accounts managed by Kanundrum Capital own (PCL)
Accounts managed by Kanundrum Capital own the Swiss Franc
Accounts managed by Kanundrum Capital are short the UK Pound
Accounts managed by Kanundrum Capital are short the Mexican Peso

For Mark Mahaney
Citigroup is a market maker in (AMZN), (GOOG), (NFLX), (YHOO)
Citigroup owns 1% or more of (NFLX), (YHOO)
Citigroup received compensation for investment banking from (AMZN), (GOOG), (YHOO) in the past 12 months.
Citigroup has, or had within the past 12 months, the following as clients, and the services provided were non-investment-banking, securities-related: (AMZN), (GOOG), (YHOO)
Citigroup has, or had within the past 12 months, the following as clients, and the services provided were non-investment-banking, non-securities-related: (AMZN), (GOOG), (YHOO)


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