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Market Pros: Is Commodity Trade Too Hot?

Considering commodities fueled the recent rally in the S&P, investors are desperate to learn what’s behind recent weakness.

Certainly there are plenty of reasons for the natural resource trade to wane.

Sudden and unexpected violence between North and South Korea triggered a flight to safety and a sharp increase in the dollar .

Also there’s concern about sustained demand.

Investors worry that Beijing’s plans to drive down inflation will also drive down China’s growth and as a result demand for resources.

"Since China obviously uses a lot of resources, if their growth is tempered it will have a negative impact on demand for commodities and materials," explains Michael McGervey, president of McGervey Wealth Management in a Reuters interview.

However bulls will argue that emerging market demand for resources is not only growing, it's exploding. They remind that Caterpillar recently inked its biggest deal in the company’s history to acquire Bucyrus as a bet on global growth.

Should you hang on or get out? How should you position now?

Instant Insights with the Fast Money traders

I really think the downside in commodities is limited, says Joe Terranova. As far as I can tell demand is still there and a lot of longs have left the trade already. If you’re worried go out and buy protection. But from what I can tell demand remains for commodities whether its oil , gold or copper . The Commitment of Traders report supports that. I wouldn't leave the space.

Long-term I agree with Joe but in the short-term I think the market is in pause mode. And if risk comes off the table it typically comes off in this space first, counters Guy Adami.

Also China’s stock market is trading terribly, adds Steve Cortes. I take it as a sign that the tightening is having real impact. I think Beijing's efforts to curb inflation has teeth and as a result I'm cautious anything related to Asian emerging markets.

Look at the run in some commodities, adds Karen Finerman. There is so much more than just demand built into these prices, it makes me a little bit afraid. At these levels the smallest thing could really change sentiment.

Of all the commodities under the microscope, I’m watching gold, says Rich Ilczyszyn of Lind-Waldock. Chart patterns suggest to me that the uptrend in gold remains in tact, he says. I expect to see gold retest $1425 perhaps as soon as the end of the year and I think next year gold goes to $1600 in 2011.

I’m also bullish gold, adds Simon Baker. I’m a buyer on any pullback.

I think the gold trade is crowded, adds Cortes, and I'd think gold bulls should be disappointed by the tepid response on Tuesday despite such bullish catalysts.

If you also think gold is going to $1600 I’d recommend playing that thesis with the GDXJ , counsels Pete Najarian, it has the most beta.

For investors who question gold's ability to rally in the face of a stronger dollar, I'd remind them that the greenback's move higher was triggered by the geo-political concerns, adds Tim Seymour. That suggest both gold as well as the dollar can rally together

Elsewhere in commodities, if you want to play copper, I’d wait to get in, adds Ilczyszyn. Investors can get a better value by using a little patience however I'm a buyer of coppper around $3.60.

*Please note trader comments above were compiled from Monday's Fast @5, Tuesday's Halftime Report and Tuesday's Fast @5

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TECH TRADE

With jittery investors selling first and asking questions later, the traders have spotted a few buying opportunities in tech.

What’s the trade?

Microsoft has not traded this cheap on a P/E basis, except for the depths of the 2008 crash, says Karen Finerman. I’m happy to get long. I find the risk reward compelling. And if it trades up to $28 I’d probably be a seller.

I like Microsoft as well but I’d rather play the chips, says Pete Najarian. Many of these names also give investors yield in the same way as Microsoft does - but I think they have much more upside.

I agree with Karen long-term but there could be potential downside in Microsoft short-term if money mangers sell this stock to get if off the books before the end of the year, adds Joe Terranova.

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BREAKING NEWS: IRELAND

In breaking news, CNBC’s Tyler Mathison reveals that according to the FT, “the Irish government is poised to take a majority stake in Bank of Ireland, which will leave the Republic without a single significant lender independent of state control.”

What must you know?

These developments make me thinks about the problems across Europe and who’s the next in line, says Tim Seymour. Everyone is talking about Spain and who are their biggest creditors – Germany and the UK.





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Trader disclosure: On November 23, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Seymour Owns (AAPL), (BAC), (BX), (TSO), (HPQ), (FXI); Finerman's Firm Is Short (WAG; Najarian Owns (BAC); Najarian Owns (GDXJ) Call Spread; Najarian Owns (MS); Najarian Owns (NUAN) Calls; Najarian Owns (PFE); Najarian Owns (YHOO); Najarian Owns (CRUS); Najarian Owns (WLT) Call Spread; Najarian Owns (MEE) Call Spread; Najarian Owns (TEVA); Najarian Owns (CNI); Najarian Owns (AKAM) Call Spread; Najarian Owns (DO); Najarian Owns (DOW); Najarian Owns (FIRE); Terranova Owns (UPL), (C), (PEP), (VRTS), (OXY), (GS), (FCX), (IBM), (CRM), (MCD), (NKE), (AAPL); Terranova Owns (CRM) Puts; Terranova Owns (FCX) Puts; 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 Is Long S&P Puts; Finerman's Firm Is Long Russell 2000 Puts; Finerman Owns (AAPL); Finerman's Firm Owns (AEO); Finerman's Firm Owns (ARO); Finerman Owns (BAC); Finerman's Firm Owns (BP); Finerman Owns (BX); Finemran Owns (DYN); Fnierman's Firm And Finerman Own (HPQ); Finerman's Firm And Finerman Own (JCG); Finerman's FIrm And Finerman Own (JPM); Finerman's Firm Owns (M); Finerman's Firm And Finerman Own (MSFT); Finemran's Firm Owns (SKS); Finerman's Firm Owns (TGT); FInerman Owns (USO); Finerman's Firm Owns (WMT); Steve Cortes is short (UNP), (CSX), Nasdaq Futures, (AAPL) and corn. Steve Cortes is long 2 Year Notes, U.S. Dollar vs. Mexican Peso, Australian Dollar, Canadian Dollar. Steve Cortes Owns (TSN) and (K).

For Anthony Scaramucci
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For Joe Terranova
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For Jeff Klinefelter
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Principal Basis (ANF), (ARO), (AEO), (GES), (GPS), (JCG), (JCP), (KSS)

For Scott Nations
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