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Fed rate hike would send S&P back to 2000

Janet Yellen
Charles Mostoller | Reuters
Janet Yellen

It was back-to-school and back to work last week, as the unofficial end of summer dawned, and reality bit.

The holiday-shortened week felt like a fulsome one, due to a fair amount of economic data, the European Central Bank meeting, and the most unsettling aspect of last week's news: The North Korea nuclear test, which set off tremors, literally and figuratively across the Korean peninsula and around-the-world.

The North Korea nuclear test was just the kind of news that tips over a shaky market, as worries grow about a possible response and reaction to it, by other countries.

The biggest letdown and primary driver of Friday's sell-off was the statements by ECB President Mario Draghi, on Thursday, who, by emphasizing the March end date of its asset purchase program, seemed to be taking a newly hawkish stand.

Speeches and comments from various Federal Reserve officials seemed to take on a renewed hawkish stance, for the most part, bolstering Chairwoman Janet Yellen's recent remark that the case for an interest rate hike has strengthened recently.

Finally, it appears the Bank of Japan is now looking to steepen its yield curve, by purchasing fewer amounts of longer-dated securities.

All of that adds up to rough sailing for the equity markets, and Friday was just a preview.

"While the Fed is arguably justified in trying to remove some accommodation, it seems like a strange time for the other two major central banks to retreat or even toy with the idea, but here we are."

S&P 500 futures had held on to hard-fought gains into record territory, but real damage was done to the chart by Friday's sell-off, which saw prices break out of the months-long trading range, between 2150 and 2185, to the downside.

Unfortunately, for investors, Friday's sell-off was confirmed by heavy volume, which was lacking through most of August.

An old Wall Street adage is never to sell a quiet a market, and the summer lull helped to keep the bears at bay, but summer is over.

Market participants moved past Janet Yellen's remark about the improved case for an interest rate hike due to the lackluster monthly employment report and some disappointing readings on U.S. manufacturing.

But, as the Dallas Fed President warned, last week, "…the market has gotten plenty of notice that [the Fed is] looking for opportunities to remove accommodation."

The Fed is likely to do just that next week, and the equity market will not like that one bit.

It seems as though the global central bankers have decided to, at least, re-examine their strategy.

Without indications of more easing measures from the ECB and BOJ, markets will not be able to hold onto their post-Brexit gains, and a Fed rate hike will most certainly exacerbate the selling.

While the Fed is arguably justified in trying to remove some accommodation, it seems like a strange time for the other two major central banks to retreat or even toy with the idea, but here we are.

Get set for a rough fall season for the equity markets.

The 2000-level for S&P 500 futures is a very realistic downside objective.

Commentary by John Kilduff, a partner at Again Capital, an investment-management firm that specializes in commodities. Follow him on Twitter @KilduffReport.

For the latest commentary on the markets in U.S. and around the world, follow @CNBCopinion on Twitter.