The US equity market reversed its rally with the better than expected ISM number on news that JPM is under SEC investigation as reported by Bloomberg.
It appears as though JPM put together a CDO with Magnetar, which helped to select some of the components. While Magnetar bought some of the CDO, it also invested a significant amount in CDS that bet on the failure of the CDO.
The implication is that JPM and Magnetar did some of the same things that Goldman and Paulson had done.
This reversed the rally and took the financials down.
Personally I think US equities are still in their trading range with 1168 as a lower bound and 1194 as the upper bound. The wiseguys are doing a daily wash and rinse on the specs. Volumes are thin and positions are almost without any substantial foundation with the average holding time of most positions under a minute. This is a market that seems primed and ready for a flash crash, but it requires some 'trigger event' to materialize. So timing a trading decline is a bit of a fool's game in the short time.
There are three events that could affect US equities this week.
First is the national midterm election tomorrow, in which the Republicans are widely expected to take control of the House of Representatives. The Senate is a much less certain outcome. Most likely there will be 'gridlock' in the US for the next two years with power more evenly balanced between Republicans and Democrats. Any divergence from expectations in the elections results could provide some momentum out of this trading range.
The next event will be the FOMC decision on Wednesday with wide expectations of a $500 billion commitment to quantitative easing. A significant deviations from this number could provoke a market reaction.
And finally back to the real economy there will be a Non-Farm Payrolls report on Friday that will be closely watched. Consensus is for 60,000 jobs to be added.
In the background there is the 'cargo cult' of new terrorist threats permeating the news with the revelation of disguised bomb packages originating in Yemen.
This market is so artificial that it is difficult to forecast just what it will do that is out of trend.
Chart added at 4:20 PM NY Time
