Is the Market Suffering From Rate Hike Fever?

Stocks incinerated quicker than a Samsung smartphone yesterday.

The Dow finished the session down 200 points. The S&P 500 and Nasdaq Composite lost 1.25% and 1.5%, respectively. When the dust settled, Tuesday went in the books as the worst day for the major averages since the early September drop that rattled stocks out of their tight August range.

Yesterday’s action also obliterated all of the behind-the-scenes progress stocks had made over the past few weeks. The market rounded up small-caps, biotechs, and other “risk-on” groups for the torture chamber. Each of these new market leaders was beaten senseless. After a quick attitude adjustment, the riskier stocks are now leading us lower…

The VIX, harbinger of doom and volatility, has jumped 8% and is back above 15 for the first time this month. If you’re searching for a silver lining after the drop, you won’t find one. Every major sector took a hit…

So is the election circus finally taking its toll on the markets? Or are bigger forces at work?

The distractions are beginning to pile up. Earnings season is upon us and the early-reporting stocks are already getting slammed. Aluminum producer and former Dow component Alcoa missed expectations and lowered guidance yesterday. As a result, investors took the stock out to the woodshed. Alcoa shares finished the trading day down more than 11%.

But the real action is happening in the currency markets.

The entire world is showing symptoms of rate hike fever. The culprit? The U.S. Dollar continues to gain strength, sending the euro and yen spiraling lower.

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After a brief summer drop, the U.S. Dollar Index continues to build strength as we barrel toward the end of the year. Yesterday, the index smashed through its July highs as traders anxiously prepare for a December rate hike.

“That is the highest level for the gauge in more than 7 months, according to FactSet data. The dollar indicator is up 2.3% so far this month, putting it on track for its best monthly gain since May,” MarketWatch reports. “However, the extended rise in the greenback may prove a headwind for major multinational companies that export products overseas, making their products more expensive to buyers using other monetary units. Technology companies, in particular, tend to draw the vast majority of their revenue overseas. Revenues in other currencies can be worth less when converted back into dollars.”

As traders, we have no choice but to pump the brakes. Market conditions are changing extremely fast. We can either adapt… or die. This isn’t the type of environment where we can just sit on our hands and wish our positions higher.

Not losing a bunch of money during any impending market mayhem is our No. 1 priority right now.

Stay smart and we’ll hit the ground running again tomorrow…

Sincerely,

Greg Guenthner
for The Daily Reckoning

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