JD DURKIN: Good Friday morning, subscribers one and all. AAP team member Bob Lang joins me now for a technical look at the first week of July trading. As you can hear here on the floor of the New York Stock Exchange, they are hyped for Mr. Lang. Thank you for being here.
Before we get there, let's kick things off with this morning's jobs report. My goodness, where do we start? Despite the stronger-than-expected ADP report out earlier this week, the Bureau of Labor Statistics reported 209,000 non-farm payrolls only for the month of June. Considering the pretty hawkish FOMC minutes, Bob, that we got a few days ago, what does this latest piece of the economic puzzle actually mean for the Fed?
BOB LANG: Well, it's an important piece for the Fed, JD. It's basically an in-line report that showed that job growth was far less than what the ADP was looking for. I think the ADP was looking for more than double what the actual number came out with for non-farm payrolls. Now remember, this is an estimate. And the ADP number is an estimate as well, too.
The fact that the report came in far less than the ADP shows that maybe the economy is just humming along and not really in that bad of shape right now. However, on the flip side of that, the Fed is paying very, very close attention to the inflation numbers, and specifically average hourly earnings, which were up 4.4% year over year. The main number was revised upwards to 4.4%. So basically, average hourly earnings were flat month over month on a year over year basis.
So I think that this is going to be a concern going forward for the Fed. I don't think there was anything in this report that said that the Fed was going to be slowing down on interest rate hikes, nor are they going to suggest that rate cuts are going to be coming in the near future. So I think they're going to keep the pressure on, keep the pedal to the metal until they have some resolve with inflation.
JD DURKIN: I mean, does this give you confidence that maybe the Fed is actually closer than previously expected to, dare I say, pulling off a bit of a soft landing when you see a number coming in at only 209, which I should say, I mean, historically speaking, that's a fine number. Any White House would celebrate 209. But in the context of the last year of change or so, it's a lot lower than people had been expecting.
BOB LANG: I think you're absolutely 100% correct, JD. I think that the Fed is coming close to pulling off this number. And listen, you know what? Better to be lucky than good sometimes. And I think the Fed is lucking out here with a strong jobs report and a strong jobs market for the past year, year and a half.
There's been nobody on the Federal Reserve who's been able to explain the strong jobs report with any good sensibility here. So I think that a strong jobs report is certainly going to help the Fed's case and their argument in trying to lead the economy down to a soft landing. So I certainly agree with you 100% that that's the case right here.
JD DURKIN: Bob, you've been doing a great job telling our members for quite a while now. These reports are lagging indicators. They don't necessarily fully reflect the current landscape of employment. Do today's numbers update that thinking for you at all?
BOB LANG: No, not at all. And remember something, that these numbers are just estimates. And they're surveys and estimates and so forth. And they get revised a year or two later to a more permanent number.
So these are not like earnings, which come out from companies. And those are hard numbers. This is not hard data. This is actually soft data. But it's a good preview of what the economy is going to look like with the employment situation.
So I think that if the economy is going to be slowing down, we won't see those reports until probably later on this year, possibly October, November, or December. We did see a slight miss on the jobs report today, which was less than what we had last month. So maybe that's starting to take hold right now, JD.
So I don't think that this number really represents what's happening in the economy right now. It's going to be more representative of what's happening six to eight months out from here.
JD DURKIN: Yeah, we also had downward revisions for May and previous months as well. To your point about revisions, the numbers, as soon as they come out, they're hardly set in stone. It takes a while, really, for the finished product to work its way through.
Taking a step back here, Bob, stocks performing far better than expected in the first half of 2023. I don't know how many people saw equities performing quite as well up until early July. What stood out to you? And what will you be watching as we move forward in Q3 of this calendar year?
BOB LANG: Well, certainly, the most obvious thing that stuck out to me, JD, was the outperformance of the NASDAQ, which had a miserable year in 2022. It gained nearly most of it back in 2023 and in just the first six months. But what also stood out to me is this, is that the Russell 2000 and the Dow Industrials leading into the start of June were either flat or slightly negative. So listen, they had a good month of June.
But I think that leading into that month, the first half of the year was not a real strong performance for either of those two indices. The S&P 500 actually had a strong first half of the year, of course led by a lot of the bigger names that are in the NASDAQ, like Apple and Amazon and Nvidia and some of these other names.
So I do think that we have to pay attention to the small caps. Small caps are a big driver of performance in the stock market. They often tend to lead up or down. When the NASDAQ started to outperform this year, we didn't see much of a move in the Russell 2000. And that divergence is somewhat troubling.
And last year, when the Russell 2000 started to move down first, it led all the other indices down in 2022. It first started with the Russell and then led to the Dow and led to the S&P 500. Then finally the NASDAQ followed after that. So I think that that's something we have to really pay attention to. If the Russell 2000 continues to underperform, we may be talking about lower prices in the second half of 2023.
JD DURKIN: Bob, I love this current debate about whether or not we are, in fact, in a bull market. If we are in one, it's certainly one that does not look like previous bull markets and is not one that will look like future bull markets. We have had multiple pullbacks of 5% or so over the course of the year.
But despite overall the recent market strength, much like our friend Chris Versace, you are not quite ready to call this a bull market. What are you waiting to see before you can officially say, we're in a bull market, and I'm ready to give it the Bob Lang stamp of approval?
BOB LANG: Yeah, so I look at the technicals obviously, JD, every single day. And the one technical that has worked for me over the years is watching the monthly chart on the S&P 500, coupled with the MACD, which is the Moving Average Convergence/Divergence, which basically shows the changing trajectory of a price of a stock or an index before it happens, not afterwards. So when we get this bullish crossover move on the MACD and we get a confirming bar on the next one, that tells me that we have a change in market environment, in market landscape, either bullish or bearish. And I can prepare for myself to play in that particular environment.
Well, the end of June was last Friday, of course. And we almost nearly had that crossover happen. It's been months in the making here, but we didn't quite get there.
So what I would need to see is another positive month, or at least moving average convergence/divergence moving positively at the end of July and then a confirming bar or a confirming move at the end of August. So for me, the earliest time we would be able to see a bull market start would be the beginning of September. And of course, that leads into some very difficult trading conditions. We often see historically seasonal patterns are weak in September and October.
So I'm going to say June was a just-miss and changing to a bull market or possibly a bull market. But we still have a chance the next couple of months lead us upwards.
JD DURKIN: We certainly do. Earlier this week in an alert, Bob, you told members that 4500 is the next level to watch on the S&P right now. We're at 4407 and change. What's the significance of 4500? Why are you watching that as a level?
BOB LANG: 4500 was an important level last year. We had some resistance up there, even going up to 4550 on the S&P 500. So we recently saw the markets try and make an attempt to get above there.
That was on Monday. The equity futures on the S&P 500 couldn't hold above 4500 at the end of the day on Wednesday. So we have that as strong resistance right here.
Now on the downside, we have 4350. 4330 actually is probably really good support on the S&P 500. So we're in that range right now, JD, right in the middle of it, 4500 to upside, 4330 to the downside. And let's call it no man's land for now.
But as we see more money flowing into the markets, we are coming up to earnings season in a couple of weeks, we may see some positive moves on the indices. So 4550 really is the area that I'd be watching closely.
JD DURKIN: Isn't that amazing that earnings season is already here? I mean, I know we've got the big banks coming around the corner. But, I mean, we had Levi Strauss already yesterday. It's like as soon as you're done with one earnings season, you think you get a reprieve. And then suddenly, I don't know where the time goes.
But I do want to ask you about volatility. That was top of mind with you and Chris on this week's podcast. Talk to me, Bob, about what the spike in the last few days really tell you about the markets as we do close out this shortened holiday trading week?
BOB LANG: Well, we've had the volatility index, the VIX, in the teens for several months here now. And it's showing that the market traders and investors are rather complacent about risk right now. So they're not worried that markets are going to come down a lot. And if they do come down, they're believing that dip buyers are going to come in there and pick up the pieces when the market falls apart.
Take yesterday, for instance. Yesterday was a big down session. And I believe the hope here for investors is that these dip buyers are going to come in here and pick up the pieces and bring the markets right back up towards that 4500 area that we just spoke about.
But I think a big pop in the VIX yesterday, and more pop in the next week or two is going to be a red flag for investors right now. I think we're heading into a seasonally weak period for the stock market right now, after coming out of a seasonally strong period in June. And if that takes hold and we do see some more selling coming out here, we'll visit some of those lower levels that I just talked about a few minutes ago.
JD DURKIN: One final question you're not necessarily expecting, if you don't mind. To the point about an appetite for risk, are we seeing a bit of a pullback from the-- I don't want to call them boring. Many people call the world of bonds boring. But they are reliable in terms of their overall returns.
Are we seeing a bit of a pullback from bonds? Is the appetite for risk there to dive back into equities overall?
BOB LANG: Yeah, so yesterday we saw the two-year yield climbing above 5%. We saw the 10-year yield above 4%, still there today. So I think people are worried about growth in the economy here, and for good measure.
I think that a slowing in the jobs market from the prior month, and if it continues to slow down, we've seen economic data this week and last week that showed that manufacturing is starting to slow down. Housing is starting to slow down a little bit as well, too. So all of that data taken together should have people worried.
And if rates are much more attractive, above 4% or 5%, we're going to see fixed-income investors starting to come in and start snapping up those bonds, like they did earlier in the year back in March.
JD DURKIN: Bob Lang, thank you as always for the great insight and the context that we need ahead of this trading day. Members Chris Versace and I will be back bright and early on Monday to get ready for the week ahead. Have a great weekend. We'll see you then.