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If Economy Gets Much Worse, Stocks Could Rally Hard: Pro

Monday, 2 Jul 2012 | 1:29 PM ET

On Monday, investors were wondering if the euphoria in the stock market generated by the EU summit last week may be short lived – very short lived.

Sentiment turned sharply negative after the latest ISM data showed the U.S. factory sector suffered its first contraction since July 2009.

“The fall in ISM was very disappointing,” says Fast trader Stephanie Link, director of research at TheStreet. The data fueled chatter that the outlook for US business was getting worse – much like in Europe and China.

ISM & Pharma's Merger Monday
The FMHR traders weigh in on how to play today's weak manufacturing numbers; Goldman's call on an eight-percent drop in the S&P. Also, China's soft economic data. And Mark Schoenebaum, ISI Group analyst, discusses the merger between Bristol-Myers and Amylin Pharma and whether the pharma sector is on the verge of consolidation.

“Now talk of recession is on he table,” Link adds. “At best, I think we’re looking at GDP of 1.5% - and that's the best case scenario.”

Looking at the numbers a little more closely, the Institute for Supply Management said its index of national factory activity fell to 49.7 from 53.5 the month before, missing expectations of 52.0, according to a Reuters poll of economists. A reading below 50 indicates contraction in the manufacturing sector.

However Fast Money pro Mike Murphy, founder and managing partner at Rosecliff Capital, says don't get too cautious. If the economic data gets a lot worse he thinks the market could actually rally. “It would signal that QE3 is back on the table,” he explains. "The Street will start to think that Big Ben will come to the rescue, again."

For a 'tell' trader Steve Grasso, director of institutional sales trading at Stuart Frankel, suggests watching the technicals. He says how the market behaves at the 100-day (about 1359) and the 50-day (about 1339) should inform your thesis.

Trader Stephen Weiss, managing partner at Short Hills Capital. doesn't quite agree. Although he concedes that if the economy gets a lot worse, QE3 could be on the table, "we're not there yet," he says after the broadcast. "ISM was bad but it wasn't a disaster."

For a 'tell' he suggests watching Friday's jobs number. "If it's a disaster, then I'd re-think my position. But without that, I don't think QE3 is coming anytime soon. I think the Fed waits for Europe."

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Posted by CNBC's Lee Brodie

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Trader disclosure: On July 2, 2012, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Stephen Weiss is short X; Stephen Weiss is short MT; Stephen Weiss is short JCP; Steve Grasso is long ASTM; Steve Grasso is long BA; Steve Grasso is long D; Steve Grasso is long FRO; Steve Grasso is long LNG; Steve Grasso is long MHY; Steve Grasso is long MO; Steve Grasso is long PFE; Steve Grasso is long S; Steve Grasso is long VLO; Steve Grasso is long XLU; Steve Grasso is long ZAZA; Mike Murphy is long TGT; Mike Murphy is long SBUX; Mike Murphy is long GBX; Mike Murphy is long COG; Mike Murphy is short WMT; Stephanie Link is long AAPL; Stephanie Link is long JPM

For Zack Shafran
Zach Shafran is long MU
Zach Shafran is long AZPN
Zach Shafran is long AAPL
Zach Shafran is long ACIW
Zach Shafran is long AZPN

For Laura Champine
Nothing to Disclose

For Chuck Grom
Nothing to Disclose

For Mark Schoenebaum
Nothing to Disclose



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