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Stocks Worst Day Since July Follows Best Day Since July

What the market giveth, the market taketh away. Both the Dow and S&P plunged on Friday giving back stellar gains from just one day ago.

Negative sentiment prevailed after a Labor Department report showed personal spending dipped 0.5 percent in September, while personal income was flat.

Those figures again turned attention to the fragile state of the consumer – which is considered vital to a recovery because consumer spending accounts for more than two-thirds of all U.S. economic activity.

Perhaps it’s due to Halloween, but investors appeared to be somewhat easily spooked and all but ignored a report that showed factory activity in the Midwest expanded for the first time in more than a year.

The irony is consumers are still in a funk even though monthly job losses are shrinking. The economy is in a recovery mode, but it will be a soggy recovery, unless the consumer starts to feel better and spend more, says Cary Leahey of Decision Economics.

For the month, both the S&P 500 and Nasdaq closed lower putting an end to seven straight months of gains. The Dow, however finished the month in positive territory by half a point.

What’s the trade?

The fact that we rallied yesterday surprised me, says Guy Adami. GDP is backward looking and it didn’t make sense to me that it sent the market so much higher. Friday’s action makes much more sense. Personally, I think there’s more downside to come. People say buy the dip but I say don't!

On Monday if you’re looking for a ‘tell’ I recommend watching transports such as CSX and BNI, adds Adami, If they continue lower I expect the market goes lower too.

It’s clear to me we’re seeing a rotation out of higher risk assets, adds Tim Seymour. It says to me that investors are questioning the quality of the rally.

I think we’re sitting on the precipice of what could be a larger decline, adds Joe Terranova.

It surprised me though that the economic data brought us down this hard, counters Karen Finerman. There was some good news too.

And on the Halftime Report, Brian Stutland of Stutland Equites said if the Vix closed above 28 he’d be a buyer of volatility and prepare for swings in the market.

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ANALYST MAYO SWIPES CITI

Shares of Citigroup fell Friday after CLSA analyst Mike Mayo said he expects the bank to write down $10 billion in deferred tax assets.

Deferred tax assets can emerge from operating losses, and can be used to offset future tax expenses. Companies must be able to show they will be profitable if they intend to use the tax asset for earnings in later periods.

But Mayo wrote that more companies might be pressured to write down deferred tax assets "given additional scrutiny related to year-end financial reporting."

He noted that Citigroup had $38 billion in deferred tax assets in the third quarter, the value of which might not get realized for several years.

Mayo also noted that there could be more scrutiny of deferred tax assets in general. "If so, the implications are significant given that any write-downs can cause lower capital, lower book value, and even lower tangible book value," Mayo wrote.

What I think Mike Mayo did was remind everyone about reality, says Chris Whalen, of Risk Analytics. There’s been enormous denial about intangible balance sheet exposures in the financials. So he kind of woke everyone up.

Elsewhere in the financials, shares of SunTrust closed lower despite a Morgan Stanley upgrade from Underweight to Equalweight and an increased price target from $26 to $30.

What’s the bank trade?

If you’re planning to buy the dip in financials I think you’re playing it all wrong, says Guy Adami. I still think Wells Fargo is a short.

If you want a long bank trade, I’d look at JPMorgan as a best in breed trade, adds Joe Terranova, or Goldman.

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ARE WE LOSING THE MARKET LEADER?

Investors are paying close attention to action in the Nasdaq after the tech index posted its first down month since February. As Fast Money series producer John Melloy wrote in his blog Behind The Money – a market without a leader can’t go higher.

What’s the trade tech trade?

It makes sense for Apple to underperform in a lousy tape, says Guy Adami. That’s what it’s been doing lately and that’s what I expect to see going forward. I’m also bearish on Intel and RIM, he adds.

If you’re looking for a long trade I’d look at Nokia, says Tim Seymour, but it's for the long-term..

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MARKET BUZZKILL: DOLLAR HITS BACK

The U.S. dollar made gains on Friday after steep losses in the previous session as investors turned to the greenback as a safe-haven amid Friday’s sharp sell-off.

"We're seeing some weakness in equities probably due to some month-end selling and that pushed the dollar higher," explains Shaun Osborne, chief currency strategist at TD Securities.

Also, since the dollar sold off most of the month, fund managers may need to buy back the dollar to maintain hedge ratios at the end of the month.

What's next for the dollar? Find out from CNBC's Rick Santelli. Watch the video now!




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Trader disclosure: On Oct. 30th, 2009, 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), (C), (GS), (INTC), (MSFT), (NUE), (BTU); Finerman Owns Puts (BAC); Finerman Owns (PDE), (FLS), (RIG), (WMT); Finerman's Firm Owns (MSFT), (NOK), (PDE), (RIG) (TGT), (WMT); Finerman's Firm Is Long Puts (AMZN); Finerman's Firm Is Long Puts (BAC); Finerman's Firm Is Long Call Spreads (BAC); Finerman's Firm Is Long (FLS); Finerman's Firm Is Short Calls (FLS); Finerman's Firm Is Short (IJR), (MDY), (SPY), (IWM), (UNG), (USO, Terranova Owns(GS); Seymour Is Short Puts (AA); Seymour Is Long Puts (BAC); Seymour Is Long Puts (BX); Seymour Is Long Puts (EEM); Seymour Is Long Puts (F); Seymour Is Short Puts (FXI); Seymour Is Long Puts (LVS); Seymour Is Long Puts (MSFT); Seymour Is Short F (PBR); Seymour Is Long Puts (SBUX)

CNBC.com with wires