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Halftime Report: Stress Tests, Who's Making The Grade?

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Stocks traded only modestly lower Tuesday despite concerns that if major banks need to raise more money a financial hurricane may be brewing.

According to published reports, preliminary stress test results show Citigroup as well as Bank of America may need to raise more capital. In fact, the shortfall at BofA amounts to billions of dollars, the reports said.

Those reports seem to confirm comments made by FDIC Chair Sheila Bair on CNBC in which she said that come May 4th – the day the results of the stress tests are expected to be made public – some banks could be in trouble.

How should you be trading?

Strategy Session with the Fast Money Traders

It should come as no surprise that Citigroup and Bank of America came up losers in the stress tests, says Zach Karabell of RiverTwice Research. But I’m not a fan of trading either of these stocks because there’s still too much government action coming down the pike that will likely impact the sector.

I like the action in Morgan Stanley, muses optionMonster Jon Najarian. It could mean that Morgan has done well in the stress tests -- but if this stock gets too far ahead of itself I’d take profits. Look for it to bounce in a range from $19-$23.

Options action in Northern Trust has caught my attention, adds Jared Levy of Peak6 Investments. The May 50-puts are getting crushed. That suggests to me the stock will stay above $48.

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SWINE-HIT STOCKS COMING BACK

It seems some of the swine flu losers from Monday are already starting to bounce back. As Fast Money Series Producer John Melloy notes in his blog, Smithfield popped likely on the realization that you simply can't get the pig flu from eating pork.

Royal Caribbean as well as Continental Airlines and others that were to suffer from lower travel demand, are also now higher.

It seems to me the fears of swine flu were overblown, says strategic investor Dennis Gartman but it sent commodities tumbling. I stepped up to buy grains yesterday, but that trade may already be done -- prices are getting back to reality.

If you look at the legacy of SARS, the best time to get into the commodities is in the pullback based on panic, adds Zach Karabell.

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TAKEOVER TUESDAY

OptionMonster Jon Najarian has spotted some unusual options activity that suggests takeover talk is heating up.

Rumors are flying around that Electronic Arts could be a takeover target, explains Najarian with speculation suggesting the acquirer could be Apple . I own ERTS calls and stock, he says.

Also I’m seeing unusual action in Vertex Pharma with Johnson & Johnson rumored to be sniffing around, he adds. And I own both.

I’ve got my eye on Ciena , adds Jared Levy, again for unusual options action.

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THE SIDEWAYS TRADE

As Jeff Macke explained on Monday’s Fast Money, he expects the stock market to trade sideways for a while -- going up and down in a range.

Specifically, the Wolf finds that 870 on the S&P has been a point of strong resistance in this bear market. As a result he counsels, shorting the S&P against 870.

In other words, when the S&P reaches that critical technical level, Macke thinks stocks are a sell.

For more trades including our last fast and furious trades please watch the video above.


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