JPMorgan, S&P Downgrades Hit Markets: Dave's Daily

JPMorgan (JPM) reported worse-than-expected results, knocking stocks lower. Thereafter rumors and leaks started that S&P was going to lower credit ratings for eurozone countries including France. This is something that's been bandied about for quite awhile. S&P probably planned to do this Friday "after" the close of trading giving investors a three day weekend to digest it. But, leaks from S&P and calls to associated governments about to be downgraded got out and stocks were sold early.

The rating agencies remain a fee conflicted lot just as they were in 1998 on Long Term Capital, 2002 Enron and pals and of course the CDO nonsense. They said they would change after each occasion but never have and won't given their fees. Ask Warren Buffett, owner of 12% of Moody's, if he wants them to change their business model.

The French response to this was rather mild for now. I was expecting a raid on S&P headquarters or baguettes being thrown by the French army but that didn't happen. The only comment from the finance ministry was: "well, we're as good as the U.S." Gawd!!!

What has been interesting, and could have been "the tell" for this market is the light ultra-light volume we've been seeing on the recent stock melt-up. Further, we were getting overbought at least short-term. Banks and financials overall have rallied sharply since the year began. JPM threw cold water on the bull's parade. But let me tell ya...bulls are a resilient bunch.

Other news of perhaps only pedestrian interest was Consumer Sentiment soared to 74 from 69.9. These results came before today's other more chilling events.

Trim Tabs ( must watch) tells us where the flow of money went in 2011. Hint: it went under the mattress to the tune of $889 billion. This is pretty unsurprising but dramatic evidence of investor flight. And this type of behavior is one reason why trading volume is light and dominated primarily by HFTs and machines. Finally, it also explains why the stock market didn't blow a gasket to the downside Friday since all those going ashore have gone.

Gold was modestly lower, the euro much lower, crude oil flat, grains lower and base metals unchanged overall.

After some time S&P started dribbling the country downgrades out one at a time. The entire downgrade list became available not until after 5PM ET and is HERE. One thing perhaps many investors don't realize is this action will cause another chain of events including more bank downgrades and a restructuring of the EFSF (European Financial Stability Facility) and ESM (European Financial Stability Mechanism) given credit rating downgrades of some sovereigns like Italy.

Volume picked-up steam Friday on the news from JP Morgan (JPM) and S&P but it's still below the three month average of 213M shares for SPY. Breadth per the WSJ was negative reversing some overbought conditions.

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SPY - The SPDR® S&P 500® ETF is a fund that, before expenses, generally corresponds to the price and yield performance of the S&P 500 Index. Our approach is designed to provide portfolios with low portfolio turnover, accurate tracking, and lower costs.
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KRE - The SPDR® S&P® Regional Banking ETF, before expenses, seeks to closely match the returns and characteristics of the S&P® Regional Banks Select Industry Index(ticker: SPSIRBK). Our approach is designed to provide portfolios with low portfolio turnover, accurate tracking, and lower costs.
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IYR - The iShares Dow Jones U.S. Real Estate Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, to the performance of the real estate sector of the U.S. equity market, as represented by the Dow Jones U.S. Real Estate Index.
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SLV - The objective of the iShares Silver Trust is for the value of the shares of the iShares Silver Trust to reflect, at any given time, the price of silver owned by the iShares Silver Trust at that time, less the iShares Silver Trust's expenses and liabilities.
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JJG - The Dow Jones-UBS Grains Subindex Total ReturnService Mark is a sub-index of the Dow Jones-UBS Commodity Index Total ReturnService Mark and reflects the returns that are potentially available through an unleveraged investment in the futures contracts on physical commodities comprising the Index plus the rate of interest that could be earned on cash collateral invested in specified Treasury Bills. The Index is currently composed of three futures contracts on grains traded on U.S. exchanges.
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EWO - The iShares MSCI Austria Investable Market Index Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of publicly traded securities in the Austrian market, as represented by the MSCI Austria Investable Market Index.
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EWZ - The iShares MSCI Brazil Index Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of publicly traded securities in the Brazilian market, as measured by the MSCI Brazil Index.
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RSX - The Russia ETF seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the DAXglobal® Russia+ Index. The Index provides exposure to publicly traded companies that are domiciled in Russia, and traded in Russia and/or on leading global exchanges. As such, the Fund is subject to the risks of investing in this country.
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EPI - WisdomTree India Earnings Fund seeks investment results that correspond to the price and yield performance, before fees and expenses, of the WisdomTree India Earnings Index.
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FXI - The iShares FTSE China 25 Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the FTSE China 25 Index.
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The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.

The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.

The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge". Our own interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day period. Greater buying of put options (protection) causes the index to rise.

Continue to Concluding Remarks

The news overall was negative but that only offered bulls a speed bump it seems. Late in the day program trading and the algos (HFTs) took over to drive prices substantially higher off the lows.

Beyond JPM, the eurozone downgrades and Consumer Sentiment the big news was what was contained in the short video from Trim Tabs. Retail investors have fled and are hiding in checking accounts and if not there than in bonds. This is a serious issue for markets and anyone involved with them. It's not just a lack of confidence but trust in markets has been lost. Once this is gone, it's hard to win back.

Please enjoy your long weekend!

Let's see what happens.

Disclaimer: The ETF Digest maintains active ETF trading portfolio and a wide selection of ETFs away from portfolios in an independent listing. Current positions if any are embedded within charts. Active Portfolios: No Positions. Our Lazy & Hedged Lazy Portfolios maintain the follow positions: XBI, QQQ, QLD, KRE, XLY, XLI, VT, MGV, BND, BSV, VGT, VWO, VNO, IAU, DJCI, DJP, VMBS, VIG, ILF, EWA, IEV, EWC, EWJ, EWG, & EWU.

 

The charts and comments are only the author's view of market activity and aren't recommendations to buy or sell any security.  Market sectors and related ETFs are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period.  Chart annotations aren't predictive of any future market action rather they only demonstrate the author's opinion as to a range of possibilities going forward. More detailed information, including actionable alerts, are available to subscribers at www.etfdigest.com .

 

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

Dave Fry is founder and publisher of ETF Digest, Dave's Daily blog and the best-selling book author of Create Your Own ETF Hedge Fund, A DIY Strategy for Private Wealth Management, published by Wiley Finance in 2008. A detailed bio is here: Dave Fry.

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