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HALFTIME REPORT: The Start of a Summer Sell-off?

The markets are losing steam today as the one-month anniversary of the summer rally comes and goes, and the bulls are on the sidelines ahead of today’s Fed meeting. Is this just a momentary blip on the radar or is it the start of the 2009 summer sell-off?

Word On The Street
Guy Adami is quick to bring up the technical analysis in the Nasdaq , which he sees as a confirmation of his belief that the markets are due for a pullback. The chart tops out in 2007, crashed significantly and now we have made a 50% correction that establishes a great trend line he explains. In part, this leads him to believe that the play right now is to be short technology in the very near-term.

Patricia Edwards of Shorehouse Partners is equally bearish in her near-term market strategy and leaves no doubt about it. “I’m actually short the entire market right now,” she said, “I don’t like what I’m seeing.” She thinks that tech will likely lead us out of the recession, but the sector may be overbought at this point.

Movement in the market’s volatility also cannot be ignored, as the VIX moved 6% during intraday trading. Jared Levy of Peak6 Investments explains that although we had a positive earnings season, “there is still a lot of negative growth out there” and sees the movement in the VIX predicting a 17 point move in the S&P 500 , but right now we’re only seeing 11-12 point moves. What does this mean? Levy says you can interpret this as options traders and other market participants are pricing in big events, probably to the downside, that may come with CPI on Friday or with the Fed meeting this week.

$75 billion Treasury Auction

This week, $75 billion in supply to hit the bond market this week, and today’s action was strong, with 3-year bonds showing strong demand selling $37 billion at 1.78% - the biggest monthly offering ever for the maturity. Going into the broader auction, Brian Kelly of Kanundrum Research has a strategy regarding the TBT which involves shorting the long end of the curve. No matter the action out of the upcoming Fed meeting, Kelly expects it to be a “lose-lose” situation for bonds. But this is no quick trade, he says, advising a strategy that would employ a 6-12 month timeframe.

Financials Leading The Sell-Off

With most of the financial sector down halfway through the trading day, analyst Dick Bove was out with a note Tuesday saying that now might be the time to take profits and that the market is in for a near-term correction. He also predicted that bank earnings for the rest of the year would not improve. But do the traders agree? 

Guy Adami, never one for doom-and-gloom, sees several reasons to think that the market could be headed downwards, with rumors of a possible Wells Fargo secondary offering and Goldman Sachs’ recent weakness there have been some interesting reversals in this market, he says.

Jared Levy agrees, at least in the short term. He points out that aside from Energy, the financial sector had the highest ratio of earnings losers-to-winners in the market while the KBW Bank Index is up close to 30% in the past month. “Price-wise,” he says, “we should see a near-term retracement.”

But how do you play it? Patricia Edwards sees reasonable strategies in shorting the KBW or the commercial real estate.

Weakness in the Oil Market

Another weak sector throughout the day was oil, moving downward as much as 2% during intraday trading. Oil fell below $70 as OPEC announced earlier in the day that demand for oil would drop as much as 1.65 million barrels per day compared to last year’s levels. Are there any opportunities to profit here?

“If anything, I want to be short oil,” says Brian Kelly, “in equities I want to be short oil drillers and the oil service names as this commodity comes down.”

Adami points out that Schlumberger has been trading around the same level for the past week as crude moved by about $7 per barrel. The company, which did not participate in this oil rally may be set to slide to the $48-49 level, he says. He agrees that shorting the oil service names could be the play to make in this market.

For more from the traders, and to see whether they think the Volt will electrify GM or shock shares of Ford , check out the video!
Trade To Go:

Pete Najarian is looking at Fluor stock, but urges caution as it’s had a huge run, but has experienced a pullback recently. He thinks this is an opportunity to get back in, as he especially likes the numbers the company has put out. He also sees the opportunity to use put protection to buy the stock, instead of selling which was a popular strategy earlier in the month.

Call The Close:

Are the traders buying or selling into today’s close?

Guy Adami: “I think this thing is headed south.”
Jared Levy: “A little rich here, gotta be a seller.”
Patricia Edwards: “I’m already short and I’m staying that way.”
Brian Kelly: “I’m a buyer.”

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