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Halftime: Beige Book To Confirm Or Deny Rally

Wednesday, 20 Oct 2010 | 1:16 PM ET

On Wednesday investors were closely watching the gains in the S&P and Dow , which were impressively strong – in fact they erased most of Tuesday’s losses.

The action puts a spotlight on the catalysts moving this market and just how potent they are. And of all those factors perhaps none is more influential than the dollar.

Looking back over the past three months the S&P and the dollar have traded in an almost perfect inverse relationship. Again Wednesday, the greenback continued its turn lower with investors returning their focus to expectations the Fed will unveil a second round of quantitative easing.

Are gains in the S&P really a sign of market strength or are advances really just bets that the dollar will fall further on QE2?

Instant Insights with the Fast Money traders

Whenever we see a pullback in the S&P we see buyers step in, explains Joe Terranova. That suggests to me the market has a strong foundation of buying interest.

However, QE2 is certainly key to the direction of the S&P. As a 'tell' I’m watching the info contained in The Beige Book – a survey of regional economic activity – which comes out later on Wednesday. The information contained within it will likely be used as an outline at the next FOMC meeting as they take a hard look at how much easing to implement, he says. I think it will be at least $500 billion.

I’m not as sold on QE as the market is, says Steve Cortes. The dollar may not be heading much lower. I think the real test of dollar weakness is to watch the dollar/euro cross. Although the euro has been hammering against $1.40 it has not gotten above 1.40 in any meaningful way. Keep an eye on the action there.

If we get a better idea of the size of QE2 after the Beige Book info is released, the question becomes whether investors should sell the news, adds Jon Najarian. I'm pretty heartened by action in stocks that were hammered early in the session such as Morgan Stanley that are trading well, he says. Investors seem to be buying stocks aggressively on dips which is bullish.

Unusual Activity: Silver
Pan American silver rises more than 2 percent midday, with the Fast Money team.

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COMMODITY COMEBACK

As you might expect, the lower dollar boosted commodity prices with the traders closely watching the action in oil.

What’s the trade?

I’d think the market has a strong foundation of buying interest, says Joe Terranova. As a result, I’d stay long the commodity trade.

I’m on the other side of the trade, says Steve Cortes, I’m especially bearish crude which has been unable to take out its August highs.

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UNUSUAL ACTIVITY: PAN AMERICAN SILVER (PAAS)

Jon Najarian has spotted unusual options action in Pan American Silver.

A larger than usual volume of November 29 puts suggests that investors expect this stock could make a sharp move lower.

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TOPPING THE TAPE: BOEING

The traders are closely watching the action in Boeing after the aviation giant posted a quarterly profit that beat expectations, and it boosted its full year forecast, helped by a strong recovery in the commercial airplane market.

Meanwhile, Delta led the transport stocks higher after the company reported a higher-than-expected quarterly profit on Wednesday, on demand for international travel.

What’s the trade?

I own Alaska Airlines, says Patty Edwards. I think these are signs that the recovery in this space is underway.

I’d play the space downstream with Precision Castparts, adds Joe Terranova. And I also extrapolate these results as positive developments for the economy, broadly.

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MARKET BUZZKILL: MORGAN STANLEY

Shares of Morgan Stanley traded lower on Wednesday after the firm reported a surprising third-quarter loss, suggesting the bank is losing hard-won ground in the battle with Goldman Sachs for Wall Street supremacy.

Morgan’s $91 million loss, on weak volumes during one of the most difficult trading quarters in recent memory, came a day after Goldman overcame those same conditions to beat Street estimates with a $1.9 billion profit.

Elsewhere in the space investors dumped shares of BofA after accusations that the company inappropriately handled more than $47 billion in mortgage bonds prompted some Wall Street analysts to downgrade its stock.

Analysts at Oppenheimer & Co and Stifel downgraded Bank of America to "perform" and "hold" respectively, after a group of investors on Tuesday accused it of inappropriately bundling mortgages into bonds

What’s the bank trade?

I sold BofA earlier in the week and rotated into Goldman, admits Patty Edwards. I think there are better places to play than BofA.

I have a $190 price target on Goldman and think it gets there just after year’s end, says Jon Najarian.

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POLL OF THE DAY

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Trader disclosure: On Oct. 20, 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 crude oil; Cortes is short gold; Cortes is short (BIDU); Cortes is short (RSX); Cortes owns U.S. Treasuries; Cortes owns the S&P 500; Jon Najarian owns (AAPL) calls; Jon Najarian owns (BA) calls; Jon Najarian owns (GS) calls; Jon Najarian owns (NFLX) calls; Jon Najarian owns (PAAS) puts; Terranova owns (AAPL), (GOOG), (TBT), (APA), (IBM), (EOG), (HES), (OIH), (OXY), (ORCL), (SU), (VRTS), (XBI), (JOYG), (RIG), (C), (UPL), (PEP), (CRM), (PFE), (MCD), (NKE), (CREE), (TER), (ARUN), (FCX), (MMM), (HOC), (SUN); Terranova is short (APOL); Terranova is short (ISRG); Terranova is short (SHLD); Terranova is short (RAX)

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 (DRYS)

For Patty Edwards
Edwards owns (AAPL) for clients
Edwards owns (BA) for clients
Edwards owns (EBAY) for clients
Edwards owns (FCX) for clients
Edwards owns (GS) for clients
Edwards owns (JPM) for clients
Edwards owns (USB) for clients

For Gregg Moskowitz
Cowen makes a market in (VMW)

CNBC.com with wires.

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