The sellers were at work again Wednesday, pushing the major averages down as the dollar’s rise — and fears of an approaching Federal Reserve interest rate hike — dampens spirits.
In the end, the Dow Jones Industrial Average lost 0.2%, the S&P 500 lost 0.2%, and the Nasdaq Composite lost 0.2%. The Russell 2000 bucked the trend to gain 0.6%.
Following the close, Bank of America Corp (NYSE:BAC) was hit after the Fed rejected the company’s capital plans.
Early gains were reversed as an initial move higher in crude oil couldn’t be sustained. From the euphoria of the Nasdaq tagging 5,000 last week for the first time since the dot-com high, the Dow Jones has now lost 650 points. Year-to-date, the Dow Jones and the S&P 500 are both down about 1%.
The catalyst continues to be growing fears that a rapidly tightening labor market will force the Fed to drop the “patience” language from its policy statement on March 18 — clearing the way for a possible interest rate hike as soon as June or September.
This is coming as a bit of an eye opener for a market that has grown dependent on the flow of cheap dollars from the Fed and the impression that chairman Janet Yellen was a staunch policy dove. Already, the market is contending with the end of the QE3 bond purchase program, which as the aftermath of the QE1 and QE2 programs in 2010 and 2011 illustrate, should result in a period of market weakness.
Now, the pendulum is swinging in the other direction. Outgoing Dallas Fed President Richard Fisher, in a speech in Houston earlier this week, was confident that Yellen would resist the temptation to avoid making the hard decisions and would start normalizing monetary policy.
St. Louis Fed President James Bullard reiterated that the Fed needs to raise rates now or soon with the unemployment rate already in line with estimates of its long-run level. He also noted that even if rates were raised in June, the overall policy stance would remain easy.
In response, I continue to recommend a defensive positioning to my Edge clients including a position in the ProShares UltraShort Europe (NYSEARCA:EPV) that is up 10.2% so far this month on simmering tensions over the situation in Greece.
For the more aggressive, Edge Pro clients recently closed a 193% gain in their Intel Corporation (NASDAQ:INTC) March $33 put options and a 116% gain in their March $385 Amazon.com, Inc. (NASDAQ:AMZN) puts.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
