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Update: Beginnings of Sharp Bank Rally?

The S&P edged higher on Wednesday in what seemed like a quiet day on the surface; but dig down just a little and you may find a market ‘tell.’

The financial sector was the best performing sector in the S&P with BofA and JPMorgan among the best performers in the Dow.

That’s notworthy because the sector has lagged through much of the autumn.

By contrast, Wednesday's strength in banks drove the S&P 500 above 1,255.08, a level last seen in September 2008, before Lehman collapsed and an important psychological barrier for investors.

Has the landscape changed enough for bank stocks - which had been laggards - to become market leaders? Are we at the beginning of a sharp rally in bank stocks?

Instant Insights with the Fast Money traders

Brian Kelly thinks signs are emerging that are bullish for banks. “There’s consolidation in the space, the yield curve is steeper and the latest GDP suggests there’s growth.”

Karen Finerman shares that bullish outlook. "I (also) see lots of good things for the space," she says. "Loan growth, buy backs, and perhaps dividend increases."

Tim Seymour does, in fact, think this sector is about to become a market leader. "I agree that all the underlying metrics are better for the sector broadly," he says. "I suspect that the market may now find leadership in the financials."


According to Scott Nations of NationShares options investors are bullish, too. "I'm seeing huge volume in March 17 calls in the XLF," he says. That's a bullish bet that the ETF trades above 17.

Chris Mustacio of Stifel Nicolaus has a slew of ideas for investors who want to establish new positions in the financials. “Wells Fargo and USB are generating great return on investment yet they trade at low P/E multiples,” he tells the desk.

Or if you want dividend yield, “look at PNC,” he says. However, if you like trades that are higher risk and potentially higher reward, Mustacio says, “Regions ,and KeyCorp ,” are (potentially) stocks with juice or beta.”

Anthony Scaramucci of Skybridge prefers to game the space with the big banks. "JPMorgan, Bank of America and Citi all appear well positioned for 2011," he says.

Steve Cortes just can’t get onboard although he admits he was squeezed out of his BofA short. “I still have a negative opinion of money center banks. I’m suspicious."

* This post was updated with more trades compiled from both Fast at 5 as well as the Halftime Report.

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BULLISH SENTIMENT HIGHEST IN 38 MONTHS

Few things gives bears more conviction than too many bulls. And the latest data shows the number of stock market bulls out there is eerily approaching the highest level since October 2007 – the month the market hit an all time high and then collapsed.

Looking at the data a little more closely, The number of bulls rose to 58.8 percent this week, the highest since the 62 percent reading three years ago, according to the long running survey of financial newsletter writers conducted by research firm Investors Intelligence.

What should you make of it?

It’s often a contrarian indicator, says Tim Seymour. But this time around I think the market has reason to be bullish because it hasn’t been for so long.

But why not protect yourself, says Karen Finerman. With the Vix so cheap, I’d buy some protection.

Fast Money executive producer writes about this phenomenon in his daily column. Click here to go to Market Slaughter Ahead? Herd Indicator Hits 3-Yr. High
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FORGET USA, YEAR OF JAPAN

You’ve probably heard some of those bullish outlooks this week on the US economy. Perhaps Goldman Sachs made the highest profile call when Jim O’Neill said 2011 would be the ‘Year of the USA.’

Barry Ritholtz of Fusion IQ thinks thinks attention must also be paid someplace else – Japan. Learn why. Watch the video now!

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RUN FROM RETAIL?

Is it time to run from retail? Nike sold off Wednesday after its earnings report triggered concerns about rising input costs and future orders.

What’s the trade?

Even after the drop, I think Nike is still too expensive to own, says Karen Finerman.

I’m a buyer at $84, says Tim Seymour. Long-term I think the company is great but right now shares are ahead of themselves.

I agree that Nike is a smart long position for 2011, adds Anthony Scramucci.

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TRADE SCHOOL: LEARNING TO CONTANGO WITH DENNIS GARTMAN

Crude oil closed at its highest level in over 2 years on Wednesday with commodities expert Dennis Gartman expecting further gains in this space.

Looking at the futures contract he’s seeing crude go from contango to backwardation, which he says is a bullish sign. Here’s a quick explanation:

TRADE SCHOOL: BACKWARDATION

Backwardation is generally a bullish signal to the market because it shows that investors/users of the commodity in question are willing to pay a premium to draw the commodity out of storage.

TRADE SCHOOL: CONTANGO

Contango generally is bearish signal because the market is giving investors/users of the commodity in question an incentive to put the commodity in storage and to be paid for doing so.






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Trader disclosure: On Dec. 22, 2010, following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Karen Finerman owns (AAPL), (GOOG), (JPM) and (MSFT). Stephen Weiss owns (DVN), (FAS), (QCOM), (TBT), (VZ), (AKS), (SWC), (COP), (HK) and (NFLX) puts. Tim Seymour owns (AAPL), (BAC) and (F).

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BRIAN KELLY
Accounts Managed By Kanundrum Capital Own (BBT)
Accounts Managed By Kanundrum Capital Own (DE)
Accounts Managed By Kanundrum Capital Own (FCX)
Accounts Managed By Kanundrum Capital Own (GLD)
Accounts Managed By Kanundrum Capital Own (JPM)
Accounts Managed By Kanundrum Capital Own (MCP)
Accounts Managed By Kanundrum Capital Own (SPY)
Accounts Managed By Kanundrum Capital Own (SLV)
Accounts Managed By Kanundrum Capital Own (WFC)
Accounts Managed By Kanundrum Capital Own USD
Accounts Managed By Kanundrum Capital Own Australian Dollar
Accounts Managed By Kanundrum Capital Own (XLE)
Accounts Managed By Kanundrum Capital Own (QCOM)
Accounts Managed By Kanundrum Capital Own (VIX ) calls

KAREN FINERMAN
Finerman's firm is short (IJR)
Finerman's firm is short (MDY)
Finerman's firm is short (SPY)
Finerman's firm is short (IWM)
Finerman's firm is long S&P puts
Finerman's firm is long Russell 2000 puts
Finerman's firm owns (GLW)
Finerman's firm owns (JPM) and (JPM) leaps
Finerman's firm owns (MSFT)

ANTHONY SCARAMUCCI
Scaramucci and Skybridge Capital own (BR)
Scaramucci and Skybridge Capital are long USD
Scaramucci and Skybridge Capital own (AAPL)
Scaramucci and Skybridge Capital own (C)
Scaramucci and Skybridge Capital (EBAY)
Scaramucci and Skybridge Capital (GOOG)

BARRY RITHOLTZ
FusionIQ Owns (EWJ)

ED GROSHANS
Disclosures pending

BRIAN NAGEL
Nagel has no disclosures

DENNIS GARTMAN
Funds Managed By Dennis Gartman are long crude

MIKE KHOUW
Cantor Fitzgerald & Co. is a market maker in (AAPL)
Cantor Fitzgerald & Co. is a market maker in (AKAM)
Cantor Fitzgerald & Co. is a market maker in (AMD)
Cantor Fitzgerald & Co. is a market maker in (AMGN)
Cantor Fitzgerald & Co. is a market maker in (ARMH)
Cantor Fitzgerald & Co. is a market maker in (AMZN)
Cantor Fitzgerald & Co. is a market maker in (BBT)
Cantor Fitzgerald & Co. is a market maker in (BBBY)
Cantor Fitzgerald & Co. is a market maker in (BAC)
Cantor Fitzgerald & Co. is a market maker in (C)
Cantor Fitzgerald & Co. is a market maker in (CSCO)
Cantor Fitzgerald & Co. is a market maker in (DELL)
Cantor Fitzgerald & Co. is a market maker in (DYN)
Cantor Fitzgerald & Co. is a market maker in (EBAY)
Cantor Fitzgerald & Co. is a market maker in (F)
Cantor Fitzgerald & Co. is a market maker in (FCX)
Cantor Fitzgerald & Co. is a market maker in (GE)
Cantor Fitzgerald & Co. is a market maker in (GS)
Cantor Fitzgerald & Co. is a market maker in (GLW)
Cantor Fitzgerald & Co. is a market maker in (GOOG)
Cantor Fitzgerald & Co. is a market maker in (INTC)
Cantor Fitzgerald & Co. is a market maker in (IWM)
Cantor Fitzgerald & Co. is a market maker in (JPM)
Cantor Fitzgerald & Co. is a market maker in (LVS)
Cantor Fitzgerald & Co. is a market maker in (MCP)
Cantor Fitzgerald & Co. is a market maker in (MOT)
Cantor Fitzgerald & Co. is a market maker in (MSFT)
Cantor Fitzgerald & Co. is a market maker in (NFLX)
Cantor Fitzgerald & Co. is a market maker in (ORCL)
Cantor Fitzgerald & Co. is a market maker in (RF)
Cantor Fitzgerald & Co. is a market maker in (RIMM)
Cantor Fitzgerald & Co. is a market maker in (SPY)
Cantor Fitzgerald & Co. is a market maker in (SLV)
Cantor Fitzgerald & Co. is a market maker in (T)
Cantor Fitzgerald & Co. is a market maker in (TCB)
Cantor Fitzgerald & Co. is a market maker in (VZ)
Cantor Fitzgerald & Co. is a market maker in (WFC)
Cantor Fitzgerald & Co. is a market maker in (VZ)
Cantor Fitzgerald & Co. is a market maker in (YHOO)



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