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Market At Crossroads: How Should You Position for 2011?

Despite a close lower on Friday, the bulls had every reason to break open the champagne and raise a glass.

Stocks put in their best December in about two decades with the S&P 500 posting a 6.5% gain for the month.

And looking back at the entire year, the S&P climbed 12.8 percent, the Dow added 11 percent and the Nasdaq surged 16.9 percent.

To the chagrin of the bears, the market is now trading at pre-Lehman levels.

But for 2011, investors find themselves at a crossroads. Companies are starting to hire, manufacturing is picking up and banks are starting to lend.

However, China is slowing down, interest rates are rising and housing prices are going nowhere.

With plenty of bullish and bearish catalysts influencing the market, should you position for further gains or a sharp sell-off?

Instant Insights with the Fast Money traders

Brian Kelly tells the desk he’s fairly bullish into 2011. “As long as the Federal Reserve continues with QE2 I’d expect stocks to continue higher,” he says.

He also points to the surprising resiliency of the consumer. "Just look at what happened at Disneyland this week," he says. "The crowds were so big they had to close the gates."

But Kelly concedes the potential of a housing double dip presents challenges. Should home prices decline significantly, it would create a strong headwind for the banks, he says.

True to his contrariarn nature, Steve Cortes leans to the bearish side. He doesn’t like the action in the Shanghai Composite, which he says has performed terribly; the weakness he feels is emblematic of China's slowdown. In turn, that presents headwinds for commodities. “I don’t believe there’s enough commodity demand without China to keep this bull going.”

Cortes also doesn’t like aspects of the December rally in the S&P. “What concerns me about the December rally is that tech did not lead,” he says. “In the first 11 months of the year it massively outperformed the S&P but not in December.”

And he adds the political winds are changing. “The Fed composition is changing dramatically with more hawkish regional presidents part of the FOMC." That could reduce the willingness to ease.

JJ Kinahan is also cautious. “I expect to see the market struggle in the first half of 2011," he says. “High unemployment is problematic and it wouldn’t surprise me to see consumers have a a day of reckoning with their credit cards.”

Stephen Weiss is solidly bullish. "I also suspect unemployment will be the big story,” he says, "but I think we’re in for a pleasant surprise - that we see it tick down -- just a little bit – but enough to keep the S&P rally going."

Pete Najarian is also bullish into the new year. “I think the grinding in the S&P at year's end was consolidation ahead of more upside.” In fact he thinks the S&P has 10% more upside. "The fact that we rallied in December is bullish in and of itself because it generates momentum into the near year."

Also Najarian believes rotation into financials will drive the next leg with options action suggesting to him that other investors share his view. He expects the XLF to push above 16 toward 17.

However Najarian does sound at least one note of caution – and that’s the sharp move higher in oil . “If gasoline prices climb rapidly I think consumers will clamp down on spending and that’s going to generate headwinds.”

What do you think? We want to know!

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Trader disclosure: On December 31st, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Cortes is short (XRT) vs. S&P; Cortes is short (XHB) vs. S&P; Cortes is short (LVS); Cortes is short (BCS); Cortes owns (TSN); Cortes owns (EXC); Cortes is long USD vs. Mexican peso; Cortes is long Treasury Bonds; Cortes is short Gold; Cortes is short Corn; Kinahan owns (BAC); Kinahan owns (C); Kinahan owns (CSCO), is short (CSCO) calls; Kinahan owns (GE), is short (GE) calls and puts; Kinahan owns (MSFT), is short (MSFT) puts; Kinahan is short (NFLX); Kinahan owns (ORCL); Kinahan is short (SPY); Kinahan owns (YHOO), is short (YHOO) calls; Kinhan owns (MOS) and (MOS) calls; Weiss owns (NFLX) puts; Weiss owns (VZ); Weiss owns (FAS); Weiss owns (QCOM); Weiss owns (NIHD); Weiss owns (JWN); Weiss owns (FNSR); Weiss owns (INFN); Weiss owns (OCLR); Boockvar owns (FXI); Boockvar owns (EWJ); Boockvar owns (GLD); Boockvar owns (MMM); Boockvar owns (NKE); Boockvar is short (IWM); Boockvar is short (SPY)

BRIAN KELLY
Accounts Managed by Kanundrum Capital own (FCX)
Accounts Managed by Kanundrum Capital own (GLD)
Accounts Managed by Kanundrum Capital own (GDX)
Accounts Managed by Kanundrum Capital own (GDXJ)
Accounts Managed by Kanundrum Capital own (SWC)
Accounts Managed by Kanundrum Capital own (XLE)
Accounts Managed by Kanundrum Capital own (OIH)
Accounts Managed by Kanundrum Capital own (JPM)
Accounts Managed by Kanundrum Capital own (WFC)
Accounts Managed by Kanundrum Capital own (BBT)
Accounts Managed by Kanundrum Capital own USD
Accounts Managed by Kanundrum Capital own (TBT)
Accounts Managed by Kanundrum Capital own (SLV)
Accounts Managed by Kanundrum Capital own (MCP)
Accounts Managed by Kanundrum Capital are short the Euro

BRIAN STUTLAND
Stutland's firm is a market maker in and owns VIX and SPX options
Stutland's firm is a market maker and holds future positions in VIX

COLIN GILLIS
Gillis has no disclosures

PETER SCHIFF
Schiff has no disclosures

MICHAEL J. WOLF
Wolf has no disclosures

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