On Tuesday, money pros and retail investors alike were scratching their heads trying to make sense of the strong gains in both the S&P and Dow.
Investors not only hit the buy button, they hit it in a big way, despite new data that showed the number of people who bought new homes fell for the third straight month in July. (In fact sales are on track to finish this year as the worst in half a century.)
But that didn't matter.
Instead, bulls came out of the woodwork largely after the latest reports hit the Street, on China's factory sector and Germany’s business activity. Both pointed to slowing growth but were not as weak as some had feared.
”The whisper numbers were 44 for China’s PMI. To get 49 point something is much better,” says Fast trader Brian Kelly.
In fact, the Dow rallied by triple digits on the news.
Although the results from overseas still show contraction, investors may be taking it as a sign that we’re in for a normal business cycle slowdown and a slight dip and not a terrible recession.
“If that’s the case then stock prices are attractive,” Kelly says.
”Sensitivity to bad news is becoming less,” muses Joe Terranova. In other words, stocks may be so oversold that data points that are simply not terrible may be all it takes to rally stocks.
“If you’re short and bearish, I’d buy upside protection,” counsels Terranova
Trader Steve Cortes doesn’t always agree with Terranova, but the two traders see eye to eye on one thing. The path of least resistance in the short term appears to be higher.
”I’m excited about the market and adding to longs,” Cortes says. “I think there are incredible bargains after the panic of the last couple of week. I’m particularly interested in dividend paying stocks. With the 10-year yield dipping below 2% - I like stocks that yield 3,4 even 5%. I’m a buyer of Southern Company, Walmart and Johnson & Johnson.”
But he adds a particularly noteworthy caveat. “Stick to the US – America has outperformed all year and I believe it will continue.”
Terranova didn’t like hearing that. He agrees with Cortes that valuations are cheap, but he thinks a big driver of a second half rally will be demand from emerging markets. “A lot of the re- acceleration that I expect to see in the second half is centered around the emerging markets consumer. The demand for energy and basic materials is resurgent.”
Trader Brian Kelly is on the other side of the trade, all together. He thinks the market is stuck in a negative feedback loop making a decline in the S&P something of a self fulfilling prophecy. “Until that stops it’s hard to feel bullish,” he says.
Trader Patty Edwards is somewhere in the middle but suggests erring on the side of caution. “I wouldn’t get into this market right now,” she says.
Edwards is concerned that the market is expecting too much from Ben Bernanke’s Jackson Hole speech on Friday. In fact she doesn’t think the Fed can really help the economy a whole lot more. “I don’t think Bernanke has the right ammo for the right gun. What we need is jobs and there’s little the Fed can do about that,” she says.
BANK OF AMERICA INTO THE ABYSS
Bank of America shares dropped to a two-year low as investors hammered the stock after blogger and former analyst Henry Blodget said a lot of people don't believe that Bank of America is correctly valuing its assets and liabilities.
He also expressed concerns about the company’s need to implement further write-downs and raise a lot more capital.
In a written response obtained by CNBC, BofA refutes Blodget’s claims.
What’s the trade?
Trader Joe Terranova thinks the woes of BofA are stock specific, part of the legacy issues that stem from BofA's Countrywide acquisition a few years ago. In the space, he likes Wells Fargo which he thinks is making a double bottom. PNC, JPMorgan and Goldman are other names in the space he thinks are attractive.
Patty Edwards says that Wells and JPMorgan are at the top of her list too.
Steve Cortes is a buyer of brokers and suggests long positions in Goldman and Morgan.
Here more from Fred Cannon, Director Of Research, at KBW. Watch the video now!
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CNBC.com with wires.