Halftime: New Dynamic Gripping Market, Strangling Bulls?
The Dow and S&P traded sharply lower on Monday with jitters about a summer swoon rippling across Wall Street.
Unlike other market sell-offs, pro investors are starting to worry that this time stocks are not going to bounce off technical levels of support.
"There are some signs that suggest the market is oversold in the near term (and could bounce), but I see a significance built into this decline. I wouldn't be surprised to see S&P down to 1,300, 1,280 levels," says James Dailey, portfolio manager at TEAM Asset Strategy Fund in a Reuters interview.
CNBC’s Fast Money traders are equally concerned.
Looking at fundamentals, Europe’s fiscal woes appear to be getting worse and there are more signs of weakness in BRIC nations. For example, new data released over the weekend showed China’s PMI hit a 10-month low.
That last data point fueled concerns that Beijing's efforts to stymie inflation are working and the second largest economy in the world is starting to cool off, sharply.
“What’s exciting about the next couple months?” asks trader Steve Grasso. Ontop of Europe and China, he reminds we’ve got the end of QE2, the Japan quake aftermath and a volcano eruption that threatens to disrupt flights.
”What do investors have to get excited about?” he says. All told we’re looking at “a different dynamic in the market.”
“Is not down as much the new up,” asks host Melissa Lee with a smile. Little did she know – the Fast traders are very worried that it is.
Instant Insights with the Fast Money traders?
Trader Pete Najarian is watching a couple signals and they’re troublesome. “The Vix rose to its highest level in 2 months.” In other words, Wall Street’s favorite measure of fear is escalating.
But more worrisome is the action in the Shanghai . “It’s sitting right at the 200-day,” Najarian says. “Watch it closely.” The conventional wisdom is that if it breaks lower, it could well take world markets with it.
Also Pete Najarian is closely watching profit taking in big cap tech. "As Shanghai breaks down we're seeing rotation out of winners," he explains. "They're taking off Oracle , they're taking off Texas ." In other words, pros are booking profits in anticipation of downside.
Trader Steve Cortes is equally bearish. He’s not only concerned by weakness in China but all the BRIC nations. “India is down on the year and so is Brazil .” Cortes largely thinks the world is over-invested in emerging markets and under-invested in the US – due to the Fed’s QE2 program which triggered a significant decline in the dollar.
Cortes thinks as QE2 draws to and end “the dollar gets off its back.” Although that should create a rotation out of emerging markets and into the US it won’t be enough of a catalyst to prevent the S&P from selling off. “We’ll simply go down slower than the rest of the world,” he says.
And because of a stronger dollar Cortes is bearish oil as well as most commodities. “They're suspect here,” he says. And as far as Cortes is concerned so are commodity related stock such as Caterpillar.
Trader Steve Grasso seems to agree. He doesn't like the technical action. "We've seen stocks pop recently (off levels of support) but that's not happening on Monday," he says. "We're struggling at 1317, which was the intra-day low from May 17th." In other words former levels of support are not holding, typically a bearish sign. "(Again), there's a different dynamic in the market."
GOLDMAN DEFIES SELL-OFF
Looking at single stock stores, the traders are watching Goldman Sachs, which managed to dodge the broader sell off on Monday.
What should you make of it?
Trader Steve Cortes reveals that he's long. "Volatility in the market should be good news for Goldman. And currently it's under-owned," he says.
Pete Najarian is watching unusual options action in Morgan Stanley. An increased volume in the June 26 / July 26 call spread suggest to Najarian, "going out to July (some investors think) financials could participate to the upside.
CHART OF THE DAY: LINKEDIN
The traders are keeping a close eye on shares of LinkedIn , which traded down about 30% since its white hot IPO on Thursday.
What’s the trade?
Pete Najarian thinks its a sign that the valuation may be infront of itself. Trader Brian Kelly however, thinks there may be a trade. "Wait and if we get a bounce when everyone expects it to fall," he counsels. If it does it's a buy, he says.
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Trader disclosure: On May 23, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Pete Najarian owns (AAPL); Pete Najarian owns (C); Pete Najarian owns (MS); Pete Najarian owns (MSFT); Cortes owns (SO); Cortes owns (EXC); Cortes owns (KFT); Cortes owns (K); Cortes owns (GS); Cortes owns (MS); Cortes is short Nikkei; Cortes is short Australian dollars; Cortes is short British Pound; Cortes is short EEM vs. S&P Long; Cortes is short (CAT); Cortes is short (DE); Grasso owns (AKS); Grasso owns (AMD); Grasso owns (ASTM); Grasso owns (BA); Grasso owns (BAC); Grasso owns (C); Grasso owns (D); Grasso owns (HOV); Grasos owns (JPM); Grasso owns (LIT); Grasso owns (LPX); Grasso owns (MHY); Grasso owns (NDAQ); Grasso owns (PFE); Grasso owns (PRST)
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