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Halftime: S&P Reaction To Spain Downgrade Market 'Tell'

As bulls and bears clash over domination of this market, investors may finally get a read on who's really winning.

This trader 'tell' comes in the form of market reaction to a downgrade.

On Friday Fitch Ratings downgraded Spain's credit rating by one notch saying the country's economic recovery will be "more muted" than the government forecast due to its austerity measures.

The way the market trades in the wake of the news -- and into Friday's close -- could reveal if the next leg will be higher or lower. That's because it will likely force the market to again test key technical levels.

What should you be watching?

Strategy Session with the Fast Money traders

As soon as the headline crossed, there was chaos on the floor of the NYSE, explains Steve Grasso of Stuart Frankel. Even though it wasn’t a shock, investors are concerned going into the holiday week-end. If we break 1086 on the S&P it could get ugly.

I also expect to see the market trade lower, says Joe Terranova. I think about 1080 is the key level and whether that level holds will be very telling.

Personally I’m a buyer of the down move, Terranova reveals. I would add to my position in American Express as well as the semis on the pullback. And I’m also watching the action in gold. I would have expected to see more buying of the precious metal but that doesn't appear to be happening.

If the market is able to stabilize in the wake of the news, I’d also be inclined to look at long opportunities, counsels Brian Kelly. I’d check out some of the US banks such as BofA or Citi that were sold-off as a knee-jerk reaction. And if the euro holds 121 in the aftermath of the news, I’d also go long.

Don’t forget that the news is crossing hours before the market closes for a holiday week-end, says Zach Karabell of RiverTwice. If you’re a long term investor I wouldn’t put a lot of emphasis on this news event. In fact, I think we see plenty of opportunities going forward this summer.

I think the Fitch thing is a dumb reason for the market to be down, adds Jim Iurio of TJM. I’m a buyer into the close.


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MAY'S WORST PERFORMERS

Over the last 4 weeks blue chips that make up the Dow have taken a hit broadly, as investors fear troubles in Europe could lead to a global slowdown.

Take a look:

Some of May's Worst Dow Performers
Microsoft Down 15%
Cisco Down 13%
Alcoa Down 13%
American Express Down 12%
GE Down 11%

However, in an environment as volatile as this investors tend to overshoot to the downside. Are some of May’s worst performers now oversold?

It seems to me selling in big cap tech was overdone, adds Zach Karabell. I don’t know when you’re ever going to see Cisco down 13% in one month again.

I think financials are overdone to the downside, says Steve Grasso. I’m a buyer of Citi, JPMorgan and BofA .

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BIG MARKET BUZZKILL: BP AND RIG

Energy was among the worst performers this month, largely due to the gulf catastrophe and concerns about what the aftermath means for companies involved in the spill – as well as the industry overall.

What’s the trade?

I'd look at long positions in Occidental and Chevron , says Jim Iuorio. They were dragged down by the news but they committed no sins.

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CALL THE CLOSE

Joe Terranova: I’d look at healthcare names such as Abbott Labs, Pfizer or Merck.

Steve Grasso: Even if the market can rally, it’s going without me. I’m a seller

Zach Karabell: I’d go short the rating agencies.

Jim Iuorio: I think the Fitch things is a dumb reason for the market to be down. I’m a buyer into the close.


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Trader disclosure: On May 28, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Iuorio Owns (GE), (C), (FXC), (FXA); Iuorio Is Long Volatility In S&P Futures; Terranova Owns (FTO), (IPSU), (RSX), (PFE), (STLD), (TER), (APA), (YHOO), (AXP), (BMO), (BBY), (DIS), (XCO), (BTU), (SWN), (GLD); Grasso Owns (DCPA), (ASTM), (ABK), (BP), (BAC), (BGP), (C), (DYN), (JPM), (LPX), (NDAQ), (PRST); Karabell owns (CSCO), (AAPL), (SLB), (GOOG), (BRCM), (C), (GS)

For Steve Grasso:
Stuart Frankel And Its Partners Own (AMR)
Stuart Frankel And Its Partners Own (BAX)
Stuart Frankel And Its Partners Own (CUBA)
Stuart Frankel And Its Partners Own (DHR)
Stuart Frankel And Its Partners Own (DYN)
Stuart Frankel And Its Partners Own (GERN)
Stuart Frankel And Its Partners Own (GS)
Stuart Frankel And Its Partners Own (HSPO)
Stuart Frankel And Its Partners Own (MERC)
Stuart Frankel And Its Partners Own (NWS.A)
Stuart Frankel And Its Partners Own (NYX)
Stuart Frankel And Its Partners Own (PDE)
Stuart Frankel And Its Partners Own (PFE)
Stuart Frankel And Its Partners Own (PRST)
Stuart Frankel And Its Partners Own (RDC)
Stuart Frankel And Its Partners Own (SYMC)
Stuart Frankel And Its Partners Own (TLM)
Stuart Frankel And Its Partners Own (TRV)
Stuart Frankel And Its Partners Own (XRX)
Stuart Frankel And Its Partners Own (SDS)
Stuart Frankel And Its Partners Own (TBT)
Stuart Frankel And Its Partners Are Short (QQQQ)



CNBC.com with wires

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C
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CVX
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JPM MLP ETN
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MRK
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OXY
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PFE
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