Halftime: How Serious is Sentiment Shift in Commodities?

Selling dominated Tuesdays market action with both the Dow and S&P trading lower as investors digested mixed earnings results from a wide range of companies.

However it was the negative action in commodities that captured the attention of the Fast Money desk.

Copper and oil – both considered proxies for global growth - traded in negative territory while gold touched a 10-week low.

Meanwhile, the 19-commodity CRB index , a global benchmark for commodities, not only declined – it was on track for its largest one-day loss since Jan. 6. In fact the CRB, as it's known, has fallen in three out of the last four sessions.

Some investors worry the widespread weakness signals a sentiment shift.

As a result, Fast trader Joe Terranova says investors need ask themselves an important question - “Do you believe the sell-off in commodities is the start of a larger reversal or do you think it’s shallow?”

Instant Insights with the Fast Money traders

Terranova thinks it will be shallow and is a buyer of the commodities weakness. He’s adding to his ag exposure with a long position in Potash and to his copper position with a long position in Freeport McMoRan. "And I also know I want to be in oil . That I'm going to buy sometime over the next week," he says.

Patty Edwards shares Terranova’s bullish outlook. “Largely I’m a buyer of dips in commodities, she says. However there is one commodity that leaves her far more cautious. “If the SLV drops below $26 I’d turn bearish on silver.”

Steve Cortes is negative commodities, broadly. “Even if they don’t drop off a cliff, they only have to not grow at the same torrid pace to generate a serious reversal,” he says. Although Cortes took off his short position in gold, it's because he wants to establish new short positions elsewhere, particularly in silver.

Jon Najarian is looking at a second derivative play. He’s watching the massive selloff in shippers such as Eagle and GNK. “With so many investors running for the exits we may be looking at a blow-out,” he says. In other words he thinks the space may be oversold.

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BANK OF AMERICA LEADING FINANCIALS LOWER

The traders are also closely watching the financials with Bank of America leading the sector lower after a CNBC reportsaid that in addition to stopping foreclosure sales last fall, the bank also stopped notices of default in some of the states with the most foreclosures.

"In other words the notices just weren't going out, that's why foreclosures stopped," says CNBC's Scott Wopner.

What’s the take-away?

The mortgage issue is a double edged sword, says Jon Najarian. Not only may be the banks be withholding information but people are having a tough time qualifying for loans. To me all this suggests the housing sector faces trouble ahead.

I don’t think the mortgage issue is going away anytime soon, adds Steve Cortes. But I am constructive on an area of the sector - the brokers. I like both Morgan Stanley and Goldman Sachs, but as beneficiaries of the volatility.

I, too, would much rather own the brokers than the banks, says Patty Edwards. But for me the play is boutique brokers.


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MARKETS CAUGHT IN EARNINGS GRINDER

You might say markets were caught in the earnings grinder Tuesday with about 16 major companies reporting results. And investors loved some of what they heard. The following stocks were rewarded:

Loved
Verizon (VZ) - Subscriber Growth
Corning (GLW) - Display Forecast
DuPont (DD) – Forecast
Brinker (EAT) – Improved Profit Margins
Baker Hughes (BHI) - Earnings Beat
CSX Corp (CSX) - Beat, Forecast
Travelers (TRV) - EPS Beat
Harley-Davidson (HOG) – Forecast

What's the trader take-away?

Subscriber growth was strong at Verizon, and they haven’t even added the iPhone yet, says Jon Najarian.

Brinker said margins were getting better in a space where most restaurants are experiencing margin pressure, says Patty Edwards. Not too shabby.

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Meanwhile, investors did not love what some other firms had to say, though in some cases results were in-line or even beat expectations. The following stocks were punished:

Unloved
Texas Instruments (TXN) - Inventory Build
VMware (VMW) - Margin Forecast
Tellabs (TLAB)- Big Forecast Miss
3M Co (MMM)- Forecast
American Express (AXP) – Forecast
Coach (COH) – Margins
Johnson & Johnson (JNJ) - Sales Miss

What’s the takeaway?

Texas Instruments talked about an inventory build and investors don’t like hearing that, says Patty Edwards. But part of the sell-off was probably profit taking after the stock made strong gains.

For VMWare to say margins won’t grow, suggests to investors they may contract, adds Jon Najarian. I suspect it could test $79-$80. Also, The sell-off Tellabs was quite severe, adds Najarian. At these levels I suspect we start to hear takeover chatter again.

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Trader disclosure: On Jan. 25, 2011, following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Jon Najarian owns (RIMM), is short (RIMM) calls; Jon Najarian owns (VZ), is short (VZ) calls; Jon Najarian owns (WMT), is short (WMT) calls; Jon Najarian owns (JWN) puts; Jon Najarian owns (AMD) puts; Jon Najarian owns (EGLE) puts; Jon Najarian owns (GS) puts; Cortes owns (GS); Cortes owns (TSN); Cortes owns (SVU); Cortes owns (CLX); Cortes is short (LVS); Cortes is short (XME) vs. S&P long; Cortes is long U.S. Treasuries; Cortes is long USD vs. Mexican Peso; Cortes is short Corn; Terranova Owns (UPL); Terranova Owns (VRTS); Terranova Owns (PVH); Terranova Owns (GM); Terranova Owns (CVI); Terranova Owns (CNQ); Terranova Owns (LTD); Terranova Owns (C); Terranova Owns (PEP); Terranova Owns (CPX); Terranova Owns (ARUN); Terranova Owns (MS); Terranova Owns (RSH); Terranova is short Gold; Terranova owns (POT); Terranova owns (CRM); Terranova owns (FCX)

For Patty Edwards
Edwards owns (SPY) for clients
Edwards owns (GLD) for clients
Edwards owns (SLV) for clients
Edwards owns (BA) for clients
Edwards owns (AMZN) for clients
Edwards owns (F) for clients
Edwards owns (V) for clients
Edwards owns (JNJ) for clients
Edwards owns (AAPL) for clients
Edwards owns (GOOG) for clients
Edwards owns (VZ) for clients
Edwards owns (MSFT) for clients
Edwards owns (RIMM) for clients
Edwards owns (C) for clients
Edwards owns (TGT) for clients
Edwards owns (MCD) for clients
Edwards owns (GLW) for clients
Edwards owns (JNJ) for clients
Edwards owns (GE) for clients

For Joe Terranova
Terranova is Chief Market Strategist of Virtus Investment Partners, LTD
Virtus Investment Partners Owns More Than 1% Of (ABAX)
Virtus Investment Partners Owns More Than 1% Of (AMKR)
Virtus Investment Partners Owns More Than 1% Of (CCG)
Virtus Investment Partners Owns More Than 1% Of (CASS)
Virtus Investment Partners Owns More Than 1% Of (CSVI)
Virtus Investment Partners Owns More Than 1% Of (EXR)
Virtus Investment Partners Owns More Than 1% Of (FCFS)
Virtus Investment Partners Owns More Than 1% Of (IGE)
Virtus Investment Partners Owns More Than 1% Of (KRC)
Virtus Investment Partners Owns More Than 1% Of (LDR)
Virtus Investment Partners Owns More Than 1% Of (LPHI)
Virtus Investment Partners Owns More Than 1% Of (NCRI)
Virtus Investment Partners Owns More Than 1% Of (DBV)
Virtus Investment Partners Owns More Than 1% Of (XLB)
Virtus Investment Partners Owns More Than 1% Of (XLV)
Virtus Investment Partners Owns More Than 1% Of (XLP)
Virtus Investment Partners Owns More Than 1% Of (XLY)
Virtus Investment Partners Owns More Than 1% Of (XLE)
Virtus Investment Partners Owns More Than 1% Of (XLI)
Virtus Investment Partners Owns More Than 1% Of (XLK)
Virtus Investment Partners Owns More Than 1% Of (XLU)
Virtus Investment Partners Owns More Than 1% Of (SUBK)
Virtus Investment Partners Owns More Than 1% Of (WDFC)
Virtus Investment Partners Owns More Than 1% Of (YDNT)
Virtus Investment Partners Owns More Than 1% Of (CLB)

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CNBC.com with wires.