J.D. DURKIN: Good morning, subscribers. With only a few trading days left of October to go and, of course, a big Fed decision hanging on the horizon, Mr. Bob Lang takes time out of his busy day to join me now to share his expectations for the week ahead. Bob, as always, thank you for being here.
I do want to start with the chart of the S&P 500. You shared this with members earlier in the week. Bob, you noted that sellers have been winning out in what's normally a seasonally strong period for the market. Do you still feel that way as we close out this week? Where are you?
BOB LANG: Yeah, J.D. , it's a continuation of the prior two months' chart indices. Specifically, the Russell 2000 and the S&P 500 are trending down, making lower highs, lower lows. And what that is that? That is the textbook downtrend, trending downward with lower highs and lower lows. This is a textbook definition of a downward move.
The bulls, obviously, were very hopeful that the calendar was going to be working in their favor this time around. And as we often enjoy a bullish seasonality this time of year, it just hasn't happened so far. But, of course, things can change. We have a new month coming up.
We have the best six month period of the year coming up starting November 1. It lasts all the way through the end of April. But with only three sessions left in October, J.D. , it's looking as if we will have three consecutive down months as we start the last two months of the year and perhaps some more selling. But you know what, don't call me the Grinch.
J.D. DURKIN: I would never call you the Grinch, of all the things, Bob. So let's talk about this S&P level here because we're right now about 4140 and change. We haven't really seen this level since May. A lot of technicians have been following this support level at 4200, 4220, wondering if we would break below that. But like you said, we're kind of in a little bit of a new ball game in the last few trading sessions. Bob, is there a new S&P level that you're targeting now that you have your eyes on as we move forward?
BOB LANG: Well, J.D. I'd be looking at the 4100 level to hold firm, and if that doesn't hold firm, there's plenty of areas below there that the S&P 500 can travel to and just fill normal gaps. So that 4200 level that you mentioned a few moments ago was the big one to hold in it, and it cut through it like a hot knife through butter on Wednesday. And so that becomes a really heavy resistance point because yesterday the move was confirmed to the downside.
Now, to the downside, again, I mentioned that 4100 level, which should see a little bit of support there. And if we do get to an extreme oversold reading, we should probably get a really nice bounce off that 4100 level. But I'm not sure if that's going to be an area where investors and traders are just going to use rallies to go ahead and sell. That's been pretty much the MO of investors and traders since the beginning part of August. Any rallies has been a selling opportunity.
But below that 4100 level, there's some gaps that still remain to be filled at around 3950 or so and a little bit below there. I know people aren't happy. They're going to be a little discouraged if we get down to those areas over there. But look, we'll talk about it in a little while, the average stock is down in 2023. So if you're in a few select names, you're doing pretty well. But otherwise, the average stock is down versus the rest of the market.
J.D. DURKIN: Bob, I've got to admit I shuddered a little bit when I heard you say 39 and change. We haven't had that level in a long time. And you're right because we have the S&P 500. But if you look at the equal weight for the S&P and you don't consolidate these names, you're down 3% to 4% equal weight S&P so far in 2023. So that top line figure, especially with those Magnificent Seven stocks, does not always tell the story.
I do want to ask you about inflation. It's a big inflation day. Happy PCE day, one and all, the Fed's favorite inflation metric coming in just about as expected-- 3/10. Paired with yesterday's stronger than expected GDP. Bob, what does this tell you about what might be next, especially since the consensus from last week's Fed head speakers basically left more rate hikes on the table if data continues to be strong?
BOB LANG: Yeah, the problem here, J.D. , is inflation is not coming down. And what stood out to me, as you mentioned yesterday's GDP number, was the jump in what's called the GDP price deflator or the price index. And from the prior quarter, from the second quarter, it was up 1.7%, much-- very tolerable. It's below the 2% objective. This is basically inflation.
Prices are jumping or contributing to the growth in GDP. This last quarter, 3.5%-- so we saw inflation from one quarter to the next actually jump up about 100%. Now, we can certainly explain that away with a rise in energy prices, rise in gas prices, and so forth. But there was a lot of other areas where prices rose, and they're managing to stick.
And, look, I mean, just last night we heard from Chipotle. They took price increases. A lot of other companies are also talking about taking price increases as well-- McDonald's. We'll hear from them next week. So this is the problem that the Fed has right now. Suppose if they had been a little bit more aggressive on the interest rate, a hawkish policy for monetary policy in the beginning and started really thumping the market with a heavy dose of higher interest rates from the start, we probably wouldn't be in this situation right now.
But coming up, after a year and a half now of interest rate hikes, they've been slow. They've been measured, but apparently they're not working very well. So I think the Fed is going to have to go into another gear here in order to get inflation down because this is going to be really troublesome, really bothersome, if the strong economy that we had yesterday just driven by price increases continues.
J.D. DURKIN: But at the same time, we have had Fed officials say, well, maybe some of this wild action happening over with treasuries is kind of doing some of our work for us. Before we cross over specifically to talk about the 10 year, Bob, do you have a case of what the Fed does next week and what the Fed does December 13 based on where we are today?
BOB LANG: I think next week the Fed is going to take a pass, and certainly the Fed fund futures are pointing in that direction right now. But I don't think it's the action of the Fed that matters the most. I think it's the language that they have in the statement and also the follow on press conference. Because as you recall, last week when there was a Q&A with Chair Powell, he came out and said deliberately that financial conditions are not tight enough.
So how do you tighten financial conditions? You restrict the amount of money that's flowing into the system. You raise interest rates, all these things to try and get the economy down. And I think they're going to be pleased with the fact that growth was 4.9%. It came in yesterday. It's going to be revised, of course, but they're not going to be pleased the fact that interest-- that higher inflation is in the system here right now.
So I certainly think that the Fed is going to stand pat. Coming up in December, though, I think that that rate hike is certainly on the table. And believe me, believe this, J.D. , nobody's pricing in any more rate hikes after a December rate hike, perhaps. I think it's about a 1 in 3 chance so it's about a third of a chance to get a rate hike in December.
What if they come in and start pricing in another rate hike in January, well, first meeting of 2024, or perhaps after that and take off the prospects of rate cuts in 2024? I think that that would be damaging to the markets. But we're not there yet. I just think that that's a potential place that we can get to, and the markets have not priced that in yet.
J.D. DURKIN: We're not there yet. Don't fight the Fed unless people want to fight the Fed, in which case it's a different conversation. But we'll cross that bridge when we get to it. All right, let's go back to this 10 year because here at the floor for the last few weeks, it's been obviously, arguably, the number one thing technicians I'm talking to talk about day to day. We've seen it right now about 486.
Obviously, we've had a criss-cross the 5:00-- the 5:00-- my goodness, I need more coffee, Bob-- the 5% level in recent trading sessions. We've heard lots of different pundits throw around buzzwords around bonds as of late. Can you simplify all of this for us, Bob? What does the recent trading tell you, and why should the average member of the portfolio at home care about what they're seeing in that particular yield movement?
BOB LANG: Well, when yields rise, J.D. , it means borrowing costs are much more expensive, and it costs more money to buy a house, to get a loan. Credit card interest rates are higher, and the whole-- your bond holdings, if there's a lot of investors who have long term bond holdings, those prices are going down. Because when yields-- remember, yields and prices move in the opposite direction.
I think not only-- when you talk about bonds, J.D. , not only is the Fed selling bonds, they're selling them at a very rapid rate now, close to $100 billion a month. They're selling them off their balance sheet, but also we're seeing that the Chinese have also been selling bonds at a slower clip over the past couple of years. Their balance sheet of US treasuries has been reduced drastically, and you have to figure out-- try to figure out who is going to take these fixed income instruments off their hands.
I just don't see it happening. And that's-- which is the demand for those bonds is low. You see yields starting to rise. We could certainly see 6% on the 10 year anytime soon. Don't forget we have another car wreck potential coming up with the government-- potential government shutdown in a few weeks. And of course, if that gets resolved, we could see the markets starting to rise.
But like last time they just put a Band-Aid over it. And then we, of course, have new leadership in Congress this week, which may not be willing to play ball with President Biden. If the government shuts down or the circus continues, we are likely to get a downgrade of our debt, and rates will certainly climb on that news. So interestingly enough, treasuries at 5% to 6%, interestingly enough, are much more attractive for a yield than say the Russell 2000, which is down 6% in 2023.
J.D. DURKIN: Do you see-- I mean, some have said they might see that 10 year even going north of 10%. Is that anything that you foresee happening or you are concerned about, Bob?
BOB LANG: If the Fed does not rein in inflation, anything is on the table, and I mean anything. I mean a double digit inflation we've had last year, it just continues to go on. We need to see negative readings now. With the work that the Fed has done for the past year and a half, it's slowly growing into-- it's dripping down into the economy.
But it's not having an effect on inflation yet. So I think the Fed has to shift into another gear here and start saying, look, we've got to be a little bit more serious, a little bit more onerous on interest rates and push them up to levels that can certainly separate the economy from inflation.
J.D. DURKIN: All right, one more here on the Fed, Bob, while I have-- I mean, I could do a long conversation with you about the Fed. But in the interest of time, I will spare you from giving us a letter grade and asking you to put on your professor hat. But from your decades of watching the Central Bank, Bob, how well is Chairman Powell doing in the fight against inflation? Is this successful at this point? Successful-ish.
BOB LANG: He's in a tough spot here, J.D. , and frankly, a tougher spot than anybody, any Fed chairman has been in the past 40 years. And imagine-- image matters to Powell. He wants to look good. But whereas, say-- go back to 40 something years ago, Paul Volcker, who was running things for the Fed, he stepped in there in 1979 and 1980 with high inflation. He didn't really care about what much people thought about him.
The man was huge. He was 6 foot 9. He didn't really care anyway. But as he raised interest rates through the roof during the 1980s, Powell could have done the same thing and been the bad guy and really popped the inflation bubble quickly and raised the Fed funds rate much more aggressively. But we would have an S&P 500-- could be half its value that it is today.
But Powell is determined and is using a measured approach. So you'd asked about the letter grade here. I would give him a B right about now, but that is up from a D minus from a few short years ago. And remember a couple of years ago, what was he talking about? Oh, inflation is just transitory. He got religion and figured out that that wasn't-- that was not a true statement and turned back and started becoming much more aggressive on interest rates.
J.D. DURKIN: Relatively unimportant side note, Bob, I was today years old when I learned that Paul Volcker also had the nickname Tall Paul. That's true, given the height you just mentioned. I looked it up. People called the man Tall Paul. So let's conclude with this. Obviously, we follow the VIX very closely, as I know you do as well. As of this morning, Bob, the index is trading in the low 20s.
It spent the last few months kind of in the teens. We'd watch that 13 level or so throughout much of this year. Last year we saw it around 24, 25, at times 26. What does all this tell you right now heading into a very significant week of earnings as well as economic data? What will you be watching for on that so-called fear index?
BOB LANG: Well, J.D. , the VIX rises when uncertainty is starting to mount, and what is uncertainty? It's the things that we cannot predict with any particular type of accuracy. So when that uncertainty starts to rise, people get a little bit nervous, get a little bit scared. Listen, some people who have been in the NASDAQ stocks since the beginning of the year, they're sporting a 30% gain for 2023. Good gain, right?
It was 40% three months ago. Now it's down to 30%. Do you want to lose that, and are you worried about all these uncertainties out there, whether it's the government, whether it's inflation, whether it's the Fed, whether it's what's happening in the Middle East, whether it's Ukraine-Russia? We can go on and on and list a whole bunch of these uncertainties out there. It just raises the temperature of the room here, and the fear level starts to rise.
So when the VIX is starting to perk up, the trend in volatility is starting to rise. We see VIX futures also moving rise-- also moving higher as well, too. It's just not the VIX cash is moving up. It's the VIX futures when you go out to January, February, March, April, and May. You see the VIX futures are also in the mid to high 20s at this point, J.D. . So the uncertainty and worry of a falling economy, these geopolitical issues that I just mentioned, make it vital to hold protection at all times. And I think using puts, buying puts, and insurance, ETFs, inverse ETFs, or simply just writing calls against your stock is a prudent move to do.
J.D. DURKIN: That is the great Bob Lang. That's going to do it. Like I said, my man, I could do this conversation with you for a very long time, but we need to leave it there. Thank you for the context and the needed perspective, as always. I hope you have a great weekend, Bob.
BOB LANG: Always great to be with you, J.D. . Have a great weekend, too.
J.D. DURKIN: You, too, my man. All right, folks, members one and all, Chris Versace and I will be back bright and early with a lot of coffee, I'm sure, Monday morning to get you ready for another very busy week ahead. We've got a Fed decision next Wednesday, more earnings on tap. Have a great weekend until then. We'll see you again soon.