'Fast Money' Recap: S&P Sinking to 850?

An economist tells the trading panel that the overvalued index is due for a swift, sizable correction.
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NEW YORK (

TheStreet

) -- The markets sagged again Tuesday as bank stocks were battered.

The

Dow Jones Industrial Average

dropped 185.68, or 1.96%, to 9310.60, and the

S&P 500

fell 22.58, or 2.21%, to 998.04. The

Nasdaq

lost 40.17, or 2%, to 1968.89.

The Institute for Supply Management's manufacturing index exceeded expectations when it rose to 52.9, while the National Association of Realtors reported an uptick in pending home sales in July for the sixth consecutive month. That good news was offset by bank stocks, which were hard hit.

Guy Adami said on

CNBC

's "Fast Money" TV show that today's action is a prelude of a market that is heading down to 970, and possibly 905.

For a breakout of some stocks from a recent "Fast Money" TV show,check out Dan Fitzpatrick's "3 Stocks I Saw on TV."

3 Stocks I Saw onTV

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Tim Seymour agreed, saying the downward move is noteworthy because it happened on a day when the volume was large and the ISM manufacturing index exceeded expectations.

Joe Terranova said the market is headed for a pullback after failing to rally on good news.

Terranova also said another indicator that the market was heading down was

Goldman Sachs

(GS) - Get Report

, which was down 3.2% today. He considers Goldman the "best stock" and the "one that will tell you where the market is going."

Seymour said the markets reacted negatively to

Wells Fargo

's

(WFC) - Get Report

efforts to pay back the TARP it owes, and

CIT Group

(CIT) - Get Report

noting it missed an interest payment.

Adami said he would short Wells and predicted it's heading down to $24. The stock closed at $26.21, down 4.76% for the day. Terranova said the selloff in the banking sector was more for technical reasons than fundamentals.

Adami said banks don't have any earnings power until they start lending, something they haven't been doing.

Both Seymour and Terranova said today's market action underscores the importance of Friday's unemployment report.

Lee said oil was slammed again today, down 3%, on top of a 4% decline on Monday. Terranova said he doesn't believe in shorting oil. Rather he said he's been scaling back on his positions in such stocks as

Weatherford

(WFT) - Get Report

and

Suncor

(SU) - Get Report

.

He also said he would short copper-related stocks like

Freeport McMoRan

(FCX) - Get Report

. Seymour said copper should have been soaring today on the strong China PMI numbers.

Najarian said he would use the pullback to get into names like

Fluor

(FLR) - Get Report

if it falls beneath $50.

Lee invited David Rosenberg, chief economist for Gluskin Sheff, for his assessment of today's selloff. He said the S&P a couple of weeks ago was priced at a 4% GDP growth rate. He said the index should really be priced more at a 2% growth rate. If that were the case, the S&P should fall to 840 to 850 as early as October.

He said he would invest in stocks that underperformed during the recent rally, focusing on consumer staples, health care and utilities.

Lee shifted to the story of the day, Wells Fargo, which sold off sharply on rumors on a secondary offering and later on an announcement that it could pay back the TARP without raising additional equity.

Paul Miller, a managing director for FBR Capital, said Wells doesn't have the capital to pay back TARP but does have a lot of earnings power. He said he doesn't think the bank can pay back the TARP unless it gets some government forebearance.

Adami, sensing where there's "smoke, there's fire," sees the stock heading down. Seymour said that scenario is not likely, although he agreed that the bank's earning power will come under pressure if it decides to repay the TARP.

Lee brought in Peter Schiff, president of Euro Pacific Capital and a noted bear. Schiff said he does not want to be in any part of the U.S. stock or bond markets. He said he would rather be in Asia where the economies are in much better shape and not reliant on heavy government subsidies.

He said the foreign markets are better because the valuations in the U.S. are too high. Moreover, he's afraid of what draconian measures the U.S. government might employ to bail out the economy.

Another bear, Nouriel Rubini, expressed his concerns about the prospects of a massive releveraging of the public sector and unstainable budget deficits in the U.S.

In the final trades, Seymour said to short

Petrobras

(PBR) - Get Report

. Adami said he was shorting

J. Crew

(JCG)

. Terranova was long

Alpha Natural Resource

(ANR)

. And Najarian said to keep an eye on

Mosaic

(MOS) - Get Report

.

-- Written by David Tong in San Francisco

"Check out

"'Fast Money'Portfolios of the Week" on Stockpickr every Thursday.

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