The bulls were out in force on Wednesday triggering speculation that the rally indeed has legs.
However, investors couldn’t help but question if the sharp gains in the S&P and Dow were a vote of confidence in stocks or more of a referendum on dollar weakness.
It’s hard to ignore the fact that for the past three months the S&P and the greenback have traded in an almost perfect inverse relationship.
And again Wednesday, the greenback continued its march lower largely due to expectations of Fed easing.
How should you position now?
Instant Insights with the Fast Money traders
We’ve rallied 5 times on the same QE story, adds Karen Finerman. It’s been driving the market for quite some time. I can’t help but wonder if it’s getting a little played out.
I have to believe there’s a growing realization that QE2 is not a panacea of all problems, says Steve Cortes. Although the stock market erased most of Tuesday’s losses other markets such as the gold market and crude market did not gain back all their lost ground. That's telling.
But on Wednesday we didn’t follow through on the downside, adds Guy Adami. That's what's surprising to me after the big run we’ve had in the S&P. It's a sign that bullish momentum is strong and I wouldn’t stand in its way. However the action scares me.
I believe strongly a dollar rally is coming in about two weeks, says Eric Jackson of Ironfire Capital, after the FOMC meeting. As a result I expect we see a pullback in stocks as well as a pullback in commodities.
I agree that the dollar is oversold, says Tim Seymour. But when I look around the world I expect to see more pressure on the dollar as investors seek yield in other currencies. Fundamentally I think the dollar should weaken but technically it’s over sold.
If you're looking for a tell, keep an eye on the dollar/euro cross, adds Cortes. Although the euro has been hammering against $1.40 it has not gotten above that level in any meaningful way. Unless that relationship breaks further declines in the dollar is probably limited.
The traders have their ear to the ground and they’re hearing that the rally in the bond market on Wednesday may have had everything to do with the following report from Medley Global Advisors.
They said the following:
FOMC members are converging upon a decision to buy Treasuries on the order of $500 billion over the next three to six months with an open-ended commitment to purchase more assets over the following 12-18 months depending on economic developments...Pay no heed to suggestions that this is not yet a done deal. As Federal Reserve Chairman Ben Bernanke has said: given the FOMC's objectives, the “case for further action” has been made.
Source: Medley Global Advisors.
What should you make of it?
I think the trade is long the long end of the Treasury curve, says Steve Cortes. I suspect we either see stocks go higher on QE and bonds go with them. Or if stocks go lower I expect we see a flight to quality.
On Wednesday, Visa‘s board of directors raised its quarterly dividend by 20 percent, in what the company called a sign of confidence in its business.
Visa, the world's largest credit and debit processing network, will pay its class A common stockholders 15 cents per share in December, rather than the previously-declared 12.5 cents.
The company's decision also raised the annual dividend to 60 cents from 50 cents.
What’s the trade?
I like Visa, says Karen Finerman. There could be more upside here.
I’d wait for a pullback, says Guy Adami. If it falls to $75-76 then I’m a buyer.
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?
BofA is a great franchise, reminds Karen Finerman, but I don’t think the contagion is over.
Once trial lawyers are in the tent – and they’re in the tent – I'm skeptical that the issue will be resolved quickly, says Steve Cortes. I suspect BofA is now looking at a multi-year issue. I would not buy BofA here. In the space I’m much more interested in Morgan Stanley and Goldman .
I sold BofA earlier in the week and rotated into Goldman, admits Patty Edwards on the Halftime Report. 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.
ANALYZE THIS: APPLE EVENT
What does Wednesday’s event mean for Apple and its ecosystem?
Find out from Jefferies analyst Peter Misek. Watch the video now!
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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; Adami owns (AGU), (BTU), (NUE), (C), (GS), (INTC), (MSFT); Adami’s wife works at Merck; 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; Finerman owns (AAPL); Finerman and Finerman’s firm owns (BAC); Finerman and Finerman’s firm owns (JPM); Finerman and Finerman’s firm owns (GOOG); Finerman’s firm owns (IBM); Finerman’s firm owns (HPQ); Finerman’s firm owns (MSFT); Finerman's firm is short (IJR); Finerman's firm is short (MDY); Finerman's firm is short (SPY); Finerman's firm is short (IWM); Finerman’s firm owns S&P 500 puts; Finerman’s firm owns Russell 2000 puts
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