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Halftime: History Suggests The S&P Should Rally, But…

They say history repeats itself and the bulls are hoping that’s true.

Since 1942, in the 12 month period following midterm elections, the S&P has seen an average gain of 17%, according to Strategas Research. They also say the S&P has gained 19% on average in the 3rd year of a president's administration.

However, the bears are quick to remind that every rule has an exception and this environment is unlike anything investors have ever seen.

They argue the market is already way overbought on hopes of a Republican win and a second round of easing from the Fed.

Will history repeat itself and stocks make broad gains?

Or is this the exception to the rule?

How should you position?

Instant Insights with the Fast Money traders

There’s been a lot of chatter that the Street was in a buy the rumor and sell the news mode, explains Joe Terranova and as a result a sell-off was imminent. However I would not sell the news, he says. The hard trade is typically the right trade and the hard trade is staying with the momentum. My counsel is to remain long, particularly the commodity related theme.

I agree that all signs suggest the market goes higher, adds Patty Edwards. I think a significant rally is coming. However I’m keeping my finger close to the sell button because there’s a great deal of uncertainty in the market and I may need to hedge.

There’s no way of knowing what we don’t know, says Jon Najarian with a wink. However, with the Vix lower I’d suggest a collar trade where you can snug up a little insurance and sell some of that upside call.

(A collar trade is a protective options strategy that is implemented after a long position in a stock has experienced substantial gains. It is created by purchasing an out of the money put option while simultaneously writing an out of the money call option, according the website Investopedia).

I think both QE2 and the elections are fully priced, says Steve Cortes. If the market advances I’d take profits and get short. My ‘tell will be moves in the dollar. I expect the greenback will recover. If we see a stronger dollar and the S&P runs further, I’d make my move.

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WEAK DOLLAR / STRONG DOLLAR

Speaking of the dollar, investors are chomping at the bit to hear from the Fed on Wednesday at the conclusion of their two day meeting.

Credit Suisse just came out with a list of the top 4 sectors to buy off a favorable announcement.

Favorable is not defined by the size of QE2, explains host Melissa Lee. But rather that QE2 results in dollar weakness and a decline in the 10-year yield.

Top 4 Sectors To Buy Off Of A Favorable QE2 Announcement
Food, Beverage & Tobacco
Health Care Equipment
Household Products
Pharma/Biotech
Source: Credit Suisse

I like this basket on the back of the QE2 but I’d also include companies with exposure to emerging markets, says Joe Terranova. I’ll also be looking at stocks such as Yum!, Nike, Expeditors and even McDonald’s .

Credit Suisse also came out with a list of the 4 sectors to buy off an unfavorable outcome – that would result in a temporary rally in the dollar and a rise in the 10-year yield.

Top 4 Sectors To Buy Off An Unfavorable Announcement
Autos
Insurance
Materials
Transportation
Source: Credit Suisse

This makes sense to me, says Steve Cortes. I suspect the dollar does not get appreciably weaker in the near-term.

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HOT TRADE: OIL KEEPS BID

The traders are closely watching the action in crude which continued its march higher. Meanwhile, BP traded higher with earnings beating expectations despite a 67% drop in third quarter profits due to oil spill-related charges.

What’s the energy trade?

I expect oil could make new highs for the year shortly, speculates Joe Terranova.


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CALL OF THE DAY: HOMEBUILDERS

Looking at Fast Money’s Call of the Day, the traders are keeping an eye on homebuilders after Deutsche Bank said that risks to homebuilders from putbacks are much less than to the banks, and that future impact has likely already been priced in.

What’s the trade?

I agree with the analysis, admits Steve Cortes. But in my view there are better places to put money to work than banks and homebuilders.




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Trader disclosure: On November 2nd, 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), (AXP), (C), (GOOG), (GS), (FCX), (IBM), (NOV), (ORCL), (PCP), (PEP), (PFE), (UPL), (VRTS), (XBI); Jon Najarian owns (BP) short calls; Jon Najarian owns (LEN) short calls; Jon Najarian owns (WYNN) short calls; Jon Najarian owns (LVS) short calls; Jon Najarian owns (MGM) short calls; Jon Najarian owns (NTRI); Cortes is short (AAPL); Cortes owns (GOOG); Cortes is short (RSX); Cortes is long S&P 500; Cortes owns (K); Cortes owns (TSN); Cortes owns (CLX); Cortes is short crude oil; Cortes is short gold; Cortes owns U.S. Treasuries

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 (CMS)
Virtus Investment Partners own more than 1% of (CSC)
Virtus Investment Partners own more than 1% of (CSVI)
Virtus Investment Partners own more than 1% of (FCFS)
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 (SOA)
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 (WMB)
Virtus Investment Partners own more than 1% of (YDNT)
Virtus Investment Partners own more than 1% of (DRYS)

For Patty Edwards
Edwards owns (V) for clients
Edwards owns (PM) for clients
Edwards owns (KFT) for clients
Edwards owns (KO) for clients
Edwards owns (PEP) for clients
Edwards owns (HNZ) for clients
Edwards owns (HSY) for clients
Edwards owns (CPB) for clients
Edwards owns (JNJ) for clients
Edwards owns (KCI) for clients
Edwards owns (MDT) for clients
Edwards owns (BDX) for clients
Edwards owns (WDFC) for clients
Edwards owns (BMY) for clients
Edwards owns (TEVA) for clients
Edwards owns (F) for clients
Edwards owns (PCL) for clients
Edwards owns (TAL) for clients
Edwards owns (XOM) for clients
Edwards owns (CVX) for clients
Edwards owns (PFE) for clients
Edwards owns (WFMI) for clients
Edwards owns (KMB) for clients
Edwards owns (EXC) for clients
Edwards owns (DUK) for clients
Edwards owns (AEP) for clients

For Daniel Clifton
***No Disclosures***

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