×

Traders See Black Hole Effect as Sell-off Feeds on Itself

Blame computer trading, margin calls, hedge fund managers with itchy trigger fingers or just too much liquidity sloshing around the system because of low Fed borrowing costs, but this selloff is feeding on itself, bringing down almost all stocks, even those not related to the cause, traders said.

European sovereign debt contagion is the catalyst this week for the S&P 500’s pullback from its highs in April. Commodity stocks are being sold, rightfully so, because they sell their product to the Euro-zone, and in dollars no less. Financials are lower because of the risk of credit drying up overseas, causing a ripple effect to lending over here. They also may be on the other side of some of that European Debt. But why is Apple down?

“Apple is not a Europe play whatsoever, but its been performing and traders need to take profits and raise cash to cover their losses,” said Pete Najarian, co-founder of OptionsMonster.com and TradeMonster.com. Forced selling is causing an opportunity in these names, according to Najarian, who said he would be looking to add to Apple when he feels the panic is over.

With all Dow Jones Industrial Average members lower and only 25 of S&P 500 constituents in the green, investors are clearly throwing the babies out with the bathwater. The S&P 500 is now down almost six percent from its high reached last month, four percent away from an official correction.

“Hedge funds look at the screen and are indiscriminately selling to lock in profits and raise cash,” said Steve Grasso, a trader on the NYSE floor for Stuart Frankel. If they survived the credit crisis and posted big gains in the last year, they and their clients are not going to take their chances navigating a foreign debt crisis, according to Grasso.

Ironically, the best performers of the day are stocks that have underperformed the market as of late. Google is little changed after falling 19 percent this year so far. If there are no profits to take then traders are holding onto it.

The good news in all of this, traders said, is that investors are still in the “buy-the-stock-back-later” mode, instead of the panic mode.

“Hedge fund investors are selling stocks like Citigroup , but telling me they will look to buy it back cheaper when this blows over,” said Grasso. “And mutual fund managers aren’t selling at all.”

For the best market insight, catch 'Fast Money' each night at 5pm ET on CNBC.

______________________________________________________
Got something to say? Send us an e-mail at fastmoney-web@cnbc.com and your comment might be posted on the Rapid Recap! If you'd prefer to make a comment but not have it published on our website send your message to fastmoney@cnbc.com.

Trader disclosure: On May 6, 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 (GS), (INTC), (BTU), (NUE), (MSFT), (AGU), (C); Najarian Owns (C) Calls; Najarian Owns (CAT); Najarian Owns (CLF) Call Spread; Najarian Owns (HPQ), Is Short (HPQ) Calls; Najarian Owns (MS), Is Short (MS) Calls; Najarian Owns (PG) Calls; Najarian Owns (XOM) Call Spread; Grasso Owns (SDS), (NDAQ), (DYN), (LPX), (ASTM), (ABK), (BAC), (BGP), (C), (JPM), (NEM), (PRST), (PFE), (BA), (T), (CSCO); Finerman's Firm Is Short (IYR), (IWM), (MDY), (SPY); Finerman's Firm Is Long S&P Puts; Finerman Owns (AAPL); Finerman's Firm Owns (BAC), (BAC) Leaps; Finerman Owns (BAC) Preferred, (BAC), (BAC) Calls; Finerman Owns (GS) Calls; Finerman's Firm Owns (IBM); Finerman's Firm And Finerman Own (JPM); Finerman's Firm Owns (KFT); Finerman's Firm Owns (MCD); Finerman's Firm And Finerman Own (RIG), (RIG) Calls; Finerman's Firm Owns (TJX), (TGT), (WMT); Kinahan Is Short (SPY); Kinahan Is Short (XLF); Kinahan Is Long (KFT) Through Options; Terranova Is Long Gold; Terranova Owns (SWN), (PFE), (XCO); Stutland Is Long (XLF) Strangle, Is Short (XLF) Calls

For JoeTerranova
Terranova Works For (VRTS)
Terranova Is Chief Market Strategist Of Virtus Investment Partners, Ltd.
Virtus Investment Partners Owns More Than 1% Of (AMKR)
Virtus Investment Partners Owns More Than 1% Of (IGE)
Virtus Investment Partners Owns More Than 1% Of (DBV)
Virtus Investment Partners Owns More Than 1% Of (XLB)
Virtus Investment Partners Owns More Than 1% Of (XLV)
Virtus Investment Partners Owns More Than 1% Of (XLP)
Virtus Investment Partners Owns More Than 1% Of (XLY)
Virtus Investment Partners Owns More Than 1% Of (XLI)
Virtus Investment Partners Owns More Than 1% Of (XLU)
Virtus Investment Partners Owns More Than 1% Of (DRYS)

For Steve Grasso
Stuart Frankel And Its Partners Own (AMR)
Stuart Frankel And Its Partners Own (BAX)
Stuart Frankel And Its Partners Own (DYN)
Stuart Frankel And Its Partners Own (CUBA)
Stuart Frankel And Its Partners Own (GERN)
Stuart Frankel And Its Partners Own (HSPO)
Stuart Frankel And Its Partners Own (MERC)
Stuart Frankel And Its Partners Own (NWS.A)
Stuart Frankel And Its Partners Own (NYX)
Stuart Frankel And Its Partners Own (PDE)
Stuart Frankel And Its Partners Own (PFE)
Stuart Frankel And Its Partners Own (PRST)
Stuart Frankel And Its Partners Own (RDC)
Stuart Frankel And Its Partners Own (TLM)
Stuart Frankel And Its Partners Own (TRV)
Stuart Frankel And Its Partners Own (XRX)
Stuart Frankel And Its Partners Own (SDS)
Stuart Frankel And Its Partners Are Short (QQQQ)
Stuart Frankel And Its Partners Are Short (CL)
Stuart Frankel And Its Partners Are Short (AAPL)

For Brian Kelly
Kanundrum Capital Is Long U.S. Dollar
Kanundrum Capital Owns (TLT)
Kanundrum Capital Owns (GLD)
Kanundrum Capital Owns (GFI)
Kanundrum Capital Owns (AUY)
Kanundrum Capital Owns (LPS)
Kanundrum Capital Owns (CCI)
Kanundrum Capital Is Short (DE)
Kanundrum Capital Is Short (NUE)
Kanundrum Capital Is Short (XOM)
Kanundrum Capital Is Short (SU)
Kanundrum Capital Is Short (HES)
Kanundrum Capital Is Short (AA)
Kanundrum Capital Is Short (CLF)
Kanundrum Capital Is Short (IBM)
Kanundrum Capital Is Short (BCS)
Kanundrum Capital Is Short (DB)
Kanundrum Capital Is Short (MCO)

For Anthony Scaramucci
Scaramucci Owns (C), Skybridge Owns (C)