U.S. stocks fell on Wednesday as investors dialed back expectations of how aggressively the Fed would act to stimulate the economy.
With the uncertain outcomes of the U.S. elections and a Fed meeting next week, traders positioned themselves for more volatile markets. The CBOE Volatility index (Chicago Options:^VIX -News) rose 2.4 percent and was up for the third consecutive day.
Materials stocks, which have rallied in recent weeks on expectations of heavy stimulus, were the day's biggest decliners. The S&P Materials index (^GSPM - News) lost 0.9 percent.
In recent sessions, investors reduced their bets on the size and timetable of the Fed's potential purchases of Treasury debt. The Wall Street Journal furthered those expectations after reporting the Fed hoped to avoid a "shock and awe" approach.
"People are using that as a reason to take profits after what has been a very strong couple of months for equities," said Tim Holland, co-portfolio manager of Aston/TAMRO Diversified Equity Fund in Alexandria, Virginia.
Among the materials sector's biggest percentage decliners, Freeport McMoRan Copper & Gold Inc (NYSE:FCX - News) slumped 2.8 percent to $95.50, and AK Steel Holding Co (NYSE:AKS - News) dropped 3.4 percent to $12.40.
The rise in volatility suggests growing caution among investors. TD Ameritrade chief derivatives strategist Joe Kinahan said investors have been hedging gains through use of options in equity index and exchange-traded funds.
"They don't necessarily want to be out of their current positions," Kinahan said. "By buying protection and hedging recent gains against their current positions, investors now have the ability to pull the cord on the downside."