Wall Street Hit as the Dow Jones Tests 16,000

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Stocks came under pressure again on Monday with important areas like biotech, Big Tech and junk bonds dropping hard.

In the end, the Dow Jones Industrial Average lost 1.9%, the S&P 500 lost 2.6%, the Nasdaq Composite lost 3% and the Russell 2000 lost 2.9% to close below its Aug. 24 “Black Monday” low, returning to levels not seen since late October.

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The catalyst is the ongoing fallout from last week’s speech by Federal Reserve chairman Janet Yellen, in which she reinforced the case for a rate hike before the end of the year, something that hasn’t happened since 2006. This was reinforced by comments by New York Fed President William Dudley, who told the Wall Street Journal that rates will go up this year.

Also contributing was another disappointing data point out of China: Industrial profits fell 8.8% year-over-year for the biggest monthly decline since 2011. That is hitting commodities once more, with crude oil dipping back below the $45 per barrel level. Treasury bonds moved higher on a safe haven bid, pushing the iShares 20+ Year Treasury Bond (NYSEARCA:TLT) up 1.7% to punch out of a two-month downtrend.

That lifted the October $122 TLT calls recommended to Edge Pro subscribers to a gain of nearly 40% since recommended on Sept. 22.

High-yield corporate bonds were hit really hard as well, with the iShares High Yield Corporate Bond Fund (NYSEARCA:HYG) dropping all the way back to levels not seen since late 2013. There are ongoing concerns about the potential for energy sector bond defaults should energy prices stay low.

All major sectors moved lower, with biotech pulling healthcare stocks down 3.8%, followed by energy, which lost 3.6%. Among the Dow components, Visa (NYSE:V) lost 4.9% while Goldman Sachs (NYSE:GS) lost 3.8%. Alcoa (NYSE:AA) was a bright spot, however, rising 5.7% on a plan to split into two companies. A number of high-profile tech stocks including Apple (NASDAQ:AAPL), as I explore here, were hit hard as well.

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The Biotech iShares (NASDAQ:IBB) was slammed another 6.3% — the seventh consecutive decline — for a total loss of 21% from its mid-September high.

IBB components include Celgene (NASDAQ:CELG), Amgen (NASDAQ:AMGN) and Gilead Sciences (NASDAQ:GILD).

The sector is being pushed down not only by broad market weakness, but by specific worries about government action to lower prescription drug prices. Today, all 18 members of the House Committee on Oversight and Government Reform called for subpoena to force Valeant Pharmaceuticals (NYSE:VRX) to turn over documents related to a huge drug price increases earlier this year.

Looking ahead, all eyes are on Friday’s non-farm payroll report for additional clues as to whether the Federal Reserve will really hike interest rates this year. The futures market puts the odds of a December rate hike at only about 40% — suggesting Wall Street just isn’t ready to admit the nearly seven-year-long experiment with 0% interest rates could come to an end.

If the Fed sticks to its guns about normalizing policy, technical indicators are warning the stock selloff could get ugly with the NYSE Composite Index violating its 200-week moving average for the first time since the August 2011 selloff. Stocks went on to lose another 13% once that threshold was crossed.

In response, I continue to recommend a defensive positioning to clients including a holding in the VelocityShares 2x VIX (NASDAQ:TVIX), which is up 20% for Edge subscribers since it was added last Tuesday.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/09/fed-rate-hike-biotech-dow-jones/.

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