US Markets Are Headed For Turbulence - How To React

US markets have been having a rough time recently. The Dow Jones Industrial Average (DIA), S&P 500 (SPY) and Nasdaq (QQQ) have all been experiencing overall declines for months now. While I'd like to tell you that these declines are likely to be short lived, I refuse to lie to you. The reality is that the US market is headed for even more turmoil. The Federal Reserve has all the ammunition it needs to pull the trigger on interest rates and that will spell disaster for the market. So today, we'll talk about why a Federal Reserve rate hike is likely to trigger more bearish activity in the market, why the Fed is likely to raise rates in October, and how binary options traders can take advantage of the trends that are soon to come.

Why Would A Federal Reserve Rate Hike Cause US Market Turmoil?

In reality, this question is relatively simple to answer. Just look back to why the Federal Reserve reduced the rate in the first place. It happened in the midst of the global financial crisis of 2008 and 2009 when just about every economy around the world was struggling. In order to stimulate the US economy, the Federal Reserve purchased bonds and reduced interest rates. Purchasing bonds put more emphasis on stocks and lower interest rates put more money back into the pockets of consumers. However, when this all happened we knew that it wouldn't and couldn't last forever. In fact, the bond purchasing program, known as quantitative easing is already long gone. The Fed put an end to that program in late 2014. However, low interest rates are still in effect, but not for long.

When the Federal Reserve does increase its interest rate, lenders will charge a higher premium for consumers to borrow money. So, when this happens, consumers will spend more money on interest, leaving less money available for spending on products and services. As a result, corporations are likely to feel the pain of lesser revenues; leading to declines in the market.

Why I Believe The Fed Will Increase Its Rate In October

We've read the posts and heard the stories all year long. First, the Fed was supposed to raise its rate in June. Then it was expected to raise its rate in September. However, I didn't subscribe to either of these theories. Essentially, rate hikes at these times wouldn't have made very much sense. However, I do agree with the economists that believe a rate hike is coming in October; based on market activity today, I would say that investors agree. After all, the Dow fell 312 points, the S&P closed the day down almost 50 points and the Nasdaq lost 142 points in yesterday's trading session. Here's why investors, including myself believe that a rate hike is coming in October…

• New Home Sales – New home sales for the month of August were incredible. In fact, it was the best month the figure has seen since February of 2008. That screams economic stability and is likely the last piece of ammunition the Federal Reserve needs in order to feel comfortable with a rate hike.
• Unemployment Rate – The US unemployment rate has been declining dramatically. While August wasn't a great month for jobs, the Unemployment rate held steady at just over 5%; an incredibly healthy rate.
• The Fed Doesn't Have Much Of A Choice – At this point, the Federal Reserve has been holding of a rate hike for quite some time. In doing so, they have been telling consumers and investors alike that the economy isn't yet strong enough to hold up higher rates. That causes pain for consumer sentiment. So, it needs to come to an end. At this point, the Federal Reserve doesn't have much of a choice. If they continue to hold off on the rate hike, their views of poor economic activity will likely become a self-fulfilling prophecy.

How To Take Advantage Of The Trends

We know that when the Fed does increase its interest rate, we're going to see widespread declines in financial markets in the US. So, watch the Fed closely in October. When they make the decision to hike rates, take advantage of downtrends on the Dow, S&P and Nasdaq by purchasing put options.