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Markets accentuate the positives of a potential rate hike

Stocks may continue pricing in the positives of higher interest rates Tuesday.

On Monday, stocks rallied in their best performance since Aug. 5. The S&P 500 was up 11 at 2180 Monday, and the sector leading the market was the group that benefits most from higher interest rate hikes – the financials. The S&P financial sector was up nearly a percent.

For Tuesday's market, there is S&P/Case-Shiller home price data at 9 a.m. EDT and consumer confidence at 10 a.m.

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Traders are still adjusting their view after a strong signal from top Fed officials Friday that a rate hike was possible as early as next month. They are also awaiting the August employment report Friday, seen as a key piece of information for the Fed ahead of its Sept. 20 and 21 meeting. Economists expect to see 180,000 payrolls were created in August, down from 255,000 in July. However, the market still gives higher odds to a December rate hike.

"While August payrolls present an obvious risk, we continue to believe market-implied probabilities for a September rate hike will end at zero, not 100," wrote Morgan Stanley interest rate strategists.

In the stock market, financial stocks have been a top performer in the past month, up 2.7 percent.

"Reading the tea leaves, given that the financials are leading the way higher, you've got one of the areas of the market that would benefit from higher rates," said Jack Ablin, CIO of BMO Private Bank. Ablin said market odds shifted to 36 percent chance for a September rate hike, but he, too, said December is more likely.

Ablin said the market could take a rate hike in stride, even though it ran into trouble after the Fed first raised rates last December because the central bank accompanied the hike with an aggressive forecast. At the time, the Fed issued a forecast showing four rate hikes for 2016.

"I think a very different message is going to come across this time," said Ablin.

John Kosar, chief market strategist at Asbury Research, said if the move higher in the financials continues, it could be a good sign for the market and so could a rate hike. "It's actually good. It might be bad for the first two hours after the Fed finally raises rates, but bigger picture for investors… having rates rise is indicative that things are getting better," said Kosar.

Kosar said he expects the Dow to be about 10 percent higher than its current level by the beginning or middle of next year.

"Bigger picture, I'm looking for the stock market to have a dip here between now and the end of the quarter, but I like the market overall, and I think we can get another 10 to 14 percent higher in some of the major indexes," he said. He expects the Russell 2000 to be 14 percent higher in the same time frame.

There are a few earnings Tuesday including Abercrombie and Fitch, Bank of Nova Scotia, Palo Alto Networks, H&R Block, and DSW.