Pros: Seek Shelter, Is a Perfect Storm Brewing?

On Monday investors couldn’t help but wonder if they were staring down the early stages of a perfect storm.

The S&P closed at its lowest levels in a month after poor manufacturing figures from Germany and China sent investors running for cover in materials and energy stocks – formerly market leaders.

Meanwhile, the drama surrounding Europe’s debt crisis stoked investor anxiety with Greece and Italy suffering new downgrades.

Also, regional elections in Spain triggered jitters with investors worried that voters may balk at austerity plans and leave some government debt at risk of default.

Ontop of those catalysts, “we’ve got the end of QE2, the Japan quake aftermath and a volcano eruption that threatens to disrupt flights,” reminds Fast trader Steve Grasso.

Is the market staring down a perfect storm? How should you position now?

Instant Insight with the Fast Money traders

Joe Terranova isn’t worried; he thinks the sell-off is merely a pause that refreshes. “Considering the significant sell-off the market has already had, I think we’re in the late innings," he says. In fact Terranova thinks it's time to rotate out of defensive areas such as health care and into other areas of the market. “I’m a buyer of CVI and I’m long FCX ,” he says.

Karen Finerman also thinks the sell-off creates opportunity. She added to her position in Caterpillar on the sell-off, however she’s defining her risk by using calls. “I wouldn’t be surprised to see month-end window dressing in the next couple days. We could see buying Thursday, Friday into next week.”

Trader Guy Adami is far more cautious. “Friday the market sold-off, then there was an afternoon bounce, then the market gave up the ghost into the close. The same action happened on Monday. It’s hasn’t happened in a long time,” he says. Adami finds that kind of action bearish. “Until S&P closes above 1325, I’d be cautious.”

Tim Seymour is in Adami’s camp. He thinks the dollar is dominating the action in the market. And Seymour says there’s a growing belief that the Dixie needs to hit the 88-89 level before it plateaus. That suggests commodity weakness will continue.

Trader Pete Najarian is watching a couple signals that he finds troublesome. “The Vix rose to its highest level in 2 months.” In other words, Wall Street’s favorite measure of fear is escalating.

And then there the action in the Shanghai . “It’s sitting right at the 200-day,” Najarian says. “Watch it closely.” The conventional wisdom is that if it breaks lower, it could well take world markets with it.

Also Pete Najarian is closely watching profit taking in big cap tech. "As Shanghai breaks down we're seeing rotation out of winners," he explains. "They're taking off Oracle , they're taking off Texas ." In other words, pros are booking profits in anticipation of downside.

Trader Steve Cortes is equally bearish. He’s not only concerned by weakness in China but all the BRIC nations. “India is down on the year and so is Brazil .” Cortes largely thinks the world is over-invested in emerging markets and under-invested in the US – due to the Fed’s QE2 program which triggered a significant decline in the dollar.

Cortes thinks as QE2 draws to and end “the dollar gets off its back.” Although that should create a rotation out of emerging markets and into the US it won’t be enough of a catalyst to prevent the S&P from selling off. “We’ll simply go down slower than the rest of the world,” he says.

And because of a stronger dollar Cortes is bearish oil as well as most commodities. “They're suspect here,” he says. And as far as Cortes is concerned so are commodity related stock such as Caterpillar.

* Insights in the post were compiled from both Fast at 5 and Halftime

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