Traders are keeping a close eye on the 1130-1150 range in the S&P with stocks expected to break one way or another.
On Monday the bears harnessed all the momentum after Microsoftweighed down the Dow and the Nasdaq after Goldman analysts downgraded the software giant citing a slower than expected recovery in PC sales.
Adding to the negative momentum troubling economic news from Ireland, Portugal and Greece triggered a flight to safety powering the U.S. dollar higher.
In turn, the stronger greenback hit commodity prices and related stocks.
How should you position now?
Instant Insights with the Fast Money traders
As far as I’m concerned 1135 is the bogie, says Guy Adami. As long as the S&P stays above that level I think the rally remains in tact.. However the mid-session reversal the market made last Thursday may have been a key reversal.
I'm a buyer of the market with a tight top, says Steve Grasso of Stuart Frankel on the Halftime Report. However if the S&P breaks below 1130 get out.
We’ve been in a very limited trading range for the past 5-6 months, reminds Zach Karabell. But that leads to attractive entry points to a lot of stocks in this market.
I think the market is more about the dollar, says Joe Terranova. In the near term everything is tied to the path of the greenback.
Althohgh we may be in for a bounce in the dollar I’d still play it short for a while longer, says Marc Chandler of Brown Brothers Harriman. Big picture I expect we’re going to see the dollar trend lower into the election but after the election we’re likely to see it gain.
I’m watching the Vix pick up steam into earnings, as well as Goldman’s downgrade of Microsoft and some bearish sentiment in Alcoa ahead of earnings season. That may actually be bullish, muses Jon Najarian. Although that seems counterintuitive, it probably keeps the market from getting ahead of itself.
GOLDMAN DOWNGRADES MICROSOFT
As we mentioned above Goldman Sachs downgraded Microsoft to "Neutral" from "Buy" and lowered its target price to $28 from $32 after reducing earnings estimates for fiscal 2011 through 2013.
"Concerns over the longer-term sustainability of the Windows/Office franchise have clearly weighed on the stock," analyst Sarah Friar wrote in a note to investors.
For Microsoft shares to unlock their value, Friar said the company needs to "materially" raise its dividend beyond a recent 23 percent increase.
"We believe this would open the door to a larger investor base and keep the company more diligent from a spending perspective," Friar wrote.
Microsoft raised its dividend last month for the first time in two years, to 16 cents from 13 cents. With this, Friar said Microsoft's dividend yield is 2.6 percent. A dividend yield of 5 percent, she added, "would be attention-grabbing, ranking Microsoft in the top 20 dividend-yielders in the S&P 500, and move the shares higher."
Friar added that, so far, Microsoft has not answered threats from smart phones and tablet computers, "which threaten to encroach on its highly profitable Windows franchise."
"Microsoft could benefit from bringing to market an appealing Windows-based tablet in the near term," she wrote.
What’s the trade?
Goldman used to be bullish on Microsoft because of Bing and the PC upgrade cycle, reminds Joe Terranova. But the market has known there were challenges in both these themes for quite some time. It’s price in; I wouldn’t get short Microsoft here.
Microsoft reminds me of Xerox, says Stephen Weiss, author of. There was a time when everyone thought they would own the business services segment. I think Steve Ballmer needs to step aside.
And on the Halftime Report Stuart Frankel's Steve Grasso says those covering MSFT are "always disappointed." The stock is "always" at the bottom of the 52-week range, he said, and doesn't think it'll have any catalysts soon.
Pete Najarian of optionMONSTER.com says MSFT is trading at the low of the 52-week range for a reason. Valuations are low, but investors need the company to produce something that will get people excited.
MARKET BUZZKILL: GOLD OFF ITS RECORD HIGH ON STRONG DOLLAR
Gold’s march higher finally paused Monday with the precious metal off its record high on a resurgent dollar. However gold bugs had company: silver, copper and palladium all slipped too.
What’s the trade?
If you believe that China is still growing I’d stay with the metals, says Joe Terranova. I’d also look at Freeport McMoRan.
If you want outperformance I’d look at the GDX, but keep in mind it’s turbo charged, says Jon Najarian. It makes bigger moves in both directions. If you have a weaker stomach then think about the GLD.
THE M&A TRADE: SARA LEE
Shares of Sara Lee jumped Monday after The New York Post said KKR approached the food maker about six weeks ago with a $12 billion offer to buy the company. However Sara Lee turned it down.
The Post article, also said Unilever would be interested in making a bid if it is not required to take the bakery division.
What’s the trade?
If they were approached by KKR why are we hearing about it in the NY Post 6 weeks later, says Jon Najarian. If they’ve been approached by KKR and shopped themselves to other private equity firms as said in published reports – where was the disclosure?
If you have profits in this stock I'd take some off the table, adds Guy Adami.
FARM TRADE NEEDS AID?
Commodities were star players in September, but they pulled back again Monday on the dollar’s strength. Do they have further to fall?
For insights we turned to Rich Ilczyszyn, Lind-Waldock Senior Market Strategist.
He tells the desk gold and grains are overbought. Find out why. Watch the video now!
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Trader disclosure: On Oct. 4, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami Owns (AGU), (GS), (INTC), (MSFT), (C), (NUE), (BTU); Adami's Wife Works At Merck ; Karabell Owns (AAPL), (FCX); Jon Najarian Is Selling (Aapl) Puts; Jon Najarian Is Long (Lvs); Jon Najarian Is Short (Lvs) Calls; Jon Najarian Is Long (Mgm); Jon Najarian Is Short (Mgm) Calls; Jon Najarian Is Short (Mos) Calls; Jon Najarian Is Short (Mos) Puts; Jon Najarian Is Long (Wynn); Jon Najarian Is Short (Wynn) Calls; Joe Terranova Is Long (EOG), (APA), (AAPL), (OIH), (VRTS), (XBI), (ARUN), (IBM), (XBI), (C), (ORCL), (PEP), (OXY), (SU), (JOYG), (RIG), (IBM), (HES), (RSH), (UPL); Stephen Weiss Owns (NIHD); Stephen Weiss Owns (SLE); Grasso owns (ASTM), (BA), (BAC), (C), (CSCO), (JPM), (LPX), (MO), (MOT), (NDAQ), (PFE), (PRST); Karabell Owns (AAPL), (GOOG), (RIMM), (C), (GS); Kinahan Owns (MSFT), (YHOO), (C), (WFC), (SPY); Najarian Owns (YHOO); Najarian Owns (WFC) Put Spread; Najarian Owns (F) Bonds; Najarian Owns (F) Call Spread; Najarian Owns (CNI); Najarian Owns (VLO); Najarian Owns (PFE); Najarian Owns (TEVA); Najarian Owns (NOV); Najarian Owns (GDXJ); Najarian Owns (DD); Najarian Owns (DO); Najarian Owns (POT) Call Spread; Najarian Owns (BUCY) Call Spread; Najarian Owns (NTAP) Call Spreads; Najarian Owns (AKAM) Call Spreads; Najarian Owns (NVLS) Call Spreads; Najarian Owns (BCSI) Call Spreads; Najarian Owns (AKAM) Calls
For Steve Grasso:
Stuart Frankel & Co and it’s partners own (AMGN)
Stuart Frankel & Co and it’s partners own (BAX)
Stuart Frankel & Co and it’s partners own (COG)
Stuart Frankel & Co and it’s partners own (CUBA)
Stuart Frankel & Co and it’s partners own (GERN)
Stuart Frankel & Co and it’s partners own (HPQ)
Stuart Frankel & Co and it’s partners own (HSPO)
Stuart Frankel & Co and it’s partners own (MERC)
Stuart Frankel & Co and it’s partners own (NWS.A)
Stuart Frankel & Co and it’s partners own (NYX)
Stuart Frankel & Co and it’s partners own (PDE)
Stuart Frankel & Co and it’s partners own (PFE)
Stuart Frankel & Co and it’s partners own (PRST)
Stuart Frankel & Co and it’s partners own (RDC)
Stuart Frankel & Co and it’s partners own (TLM)
Stuart Frankel & Co and it’s partners own (XRX)
Stuart Frankel & Co and it’s partners own (SDS)
Stuart Frankel & Co and it’s partners are short (QQQQ)
For Zach Karabell:
Karabell's Firm Is Long (WCN)
Karabell's Firm Is Long (MSFT)
Karabell's Firm Is Short (SPY)
Karabell's Firm Is Short (QQQQ)
For Mike Khouw
Cantor Fitzgerald Is A Market Maker In (ADM)
For Vance Edelson
Morgan Stanley Owns 1% Or More Of (EXBD), (URS)
Morgan Stanley Has Advised On A Public Offering Of (RSG), (WM)
Morgan Stanley Has Received Compensation For Inv. Banking services from (RSG), (RHI) (URS), (WM)
Morgan Stanley Makes A Market In Shares Of (RSG), (URS), (WM)
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