CHRIS VERSACE: Good morning, Action Alerts Plus members. And Happy Friday. Bob Lang joins us now on a busy week for the Fed and an even busier one for the bulls. We saw a record number of 52-week highs for the major averages after the Fed held rates steady, as expected, and left believers in the Goldilocks narrative a lot to hope for. We'll talk about the Fed in a moment. But first, Bob, what's the significance of these fresh highs? And what does it mean for the market going forward?
BOB LANG: Great to see you, Chris. So I'm not so sure about the Goldilocks scenario here because, as you know, in that fairy tale, in the original version, the bears threw Goldilocks in a fire and then doused her with water and finally impaled her on the church steeple. But let's go with the friendlier version, where she just runs away. The scenario, of course, in the markets is playing out nicely for the bulls here, with decent economic data, slow and steady decline of inflation.
I look at a three-month moving average of data to see where trends are really at, not just one month. And if you look at the CPI, Chris, over the past three months, the annualized number is about 1.66%, far below what the Fed's hopeful 2% objective is on an annualized basis. And of course, that's only three months of action.
If we had that sort of rate going for the next nine months, I think the Fed would be much more inclined to be on a rate cut path down the road. So it's no wonder that with that 1.66% on the three-month moving average, no wonder that they're starting to look at a timeline of rate cuts. Inflation is coming down. And higher for longer just may not be all that necessary in 2024.
CHRIS VERSACE: OK, Bob, let me just ask you a question about seasonality and historical trends. I know you follow market seasonality very closely. We're in a seasonally strong time of the year for the market. So when you look at the recent rally, what role did seasonality play? And do you expect that seasonality to play out through the balance of 2023 and into 2024?
BOB LANG: Definitely. And you know what's interesting, Chris, about seasonality, there's no fundamental reasons for seasonal trends to exist, right? It's just that people's emotions and people's feelings about how markets are going to move pretty much dictate the activity and the action into markets. And again, seasonal trends around this time of year have been really bullish and strong for the past 25, 30 years, even longer than that.
But it's amazing how the markets just continue to rally with the difficult setup that we had as we exited October. We hit a 4,100 level. JD and I were talking about that, Chris, at the end of October. And on that Friday, we actually did hit 4,103. And it was really a launch point for stocks at that point. And stocks bounced off there and made their way higher by more than 14%, Chris, over a six-week time period. That's a lot of movement in a short period of time. But the Russell 2000 and the Dow Industrials actually moved more than 14% over that period of time. A lot of that movement happening in the last couple of weeks for those two indices.
I suspect, though, we continue to rally through year-end, Chris. But it won't be easy getting to an S&P all-time high, which is at 4,818, which we saw at the beginning of 2022. I expect there to be at least tagged at least once over the next nine sessions. Remember, after today, there's only nine trading sessions left in 2023. So if they want to attack that dry and get through there by the end of the year, they've got to hurry. It's only 2 and 1/2% away. But still, 100 points on the S&P 500 could be heavy lifting, especially with an overbought market right now.
CHRIS VERSACE: All right, Bob. Well, let's get back to the Fed. It acted as expected earlier this week. But markets reacted more like we actually saw them deliver rate cuts, not keep the Fed funds rate constant. So in your view, was this more of a pivot? Or is there something else going on?
BOB LANG: Chris, we always see the markets trying to get ahead of the curve here, right? And in this case, the Fed, frankly, calling for so many rate cuts as the Fed funds futures have right now, which is currently pricing in probably about seven rate cuts between now and the end of 2025, it's got that feeling of somewhat like catching a falling knife here, right? The Fed has really no idea, well, from meeting to meeting and watching the data. I agree that this is more of a pivot, Chris.
And as you and I were chatting on Wednesday, just after the Fed statement came out, we both agreed that right after the statement was released that the Fed had actually did a pivot off of hawkish policy somewhat probably more into a neutral camp right now and leaning towards that dovish area. But still, they're being very cautious at this point in time. But we talked about it, and we saw a lot of other people agree with us that the Fed had made that pivot.
CHRIS VERSACE: OK, so when we broke down what the Fed said in that conversation on Wednesday, we were kind of kicking back a couple of different things. But Powell continued to stick to the meeting by meeting commentary that he's been kicking out there. So let's share with members, Bob, what do you think the timing is for the Fed to begin cutting rates? And what will you be looking for?
BOB LANG: Well, it's all dependent upon the data, Chris, and how much of a decline we see in inflation. The labor market remains robust and is not telling us the economy is crumbling at this time. Retail sales were good this week. You wrote a very good article about the strength in retail sales on the back of benign CPI and PPI numbers. Energy, though, may spark up higher prices with coal in major cities.
But by and large, we see the Fed cutting rates slower than most expect. And I think that with the runup in the stock market, that's going to create a little bit of disappointment here for the crowd if they do take a slower approach, which I think a slow market approach is the right thing to do. The projections yesterday, of course, for the Fed funds futures showed about six rate cuts by the end of 2025. That's gone up to about seven now, taking rates to about 3.6%, which is right near the neutral level. I'd say the neutral level is somewhere between 3% to 3 and 1/2%.
So all those rate cuts they baked into the market right now, they pretty much are with the market. Are they baked into what the Fed is looking at right now? Probably not. But if they do get down to that 3.6% range, Chris, we're talking that they're probably done with rate cuts at that point. The market, though, is trying to price in these rate cuts right now probably more on the front end than on the back end of 2025 and telling the Fed just to hurry up.
CHRIS VERSACE: Well, we'll see what the data says, Bob. And I think we'll continue to gauge how quickly or not we might see the Fed cutting those interest rates. But as you and I have talked about more than several times over the last few months, it wouldn't be the first time the market is out over its skis when it comes to expecting what it thinks the Fed might do.
Now, let's end today's Rundown on a critical topic. And it's probably one that, to be candid, most members probably aren't even thinking about. Today marks a major option, excuse me, expiration day. And before we get to the specifics of that, Bob, explain to us what options expirations are and why they're important, even if members don't trade options.
BOB LANG: So every three months starting with March in the calendar year, with March, June, September, and December, it's the third Friday of the month on each of those months we have a major exploration day. And we have three different series of options colliding with exploration anytime during the day. So we have index options. We have options on futures. And we have equity options. And those are all expiring anytime during the day. Some actually expired right at the open, Chris. And some are going to expire later in the day. And most of them are going to expire at the end.
So why is it important? So basically it's important because there are a lot of open interest, a lot of value that is still out there that needs to get exercised. And we're talking about exercising options from in the money options or at the money options. So there's some value there. And some traders are going to try to take advantage on either side of those. And if they do get exercised over the weekend, they're going to have stocks sitting in their portfolio or they're going to have stock taken away from their portfolio.
From what I understand, what I've been reading, is that today is the largest expiration day in the history of the options market. And I think something like $20 trillion worth of options, notional value, is going to be expiring today, Chris. So that's an important aspect in terms of just today's action looking at volatility and looking into next week.
Now, we have an overbought market. We have volatility as we read it from the VIX, down at about 12%. So the market is pretty overbought here right now. So if there is some excess selling that's going to happen next week because somebody got some stock that they didn't expect to get in their portfolio, then that's going to hit next week. And we could see a little bit of softness as we head into the holiday season.
CHRIS VERSACE: So an overbought and arguably complacent market. But, Bob, what's so special about today and options being a triple witching day?
BOB LANG: Yeah, so you have all these series of options expiring today. And it's the last one of the year, Chris. And some pretty big numbers we'll be seeing at 4:00 PM, meaning the volume is going to be spiking up at the end of the day. And we're going to see some huge volume turnover numbers at the end of the day due to the fact the open interest is pretty high this time around.
Yeah, literally, for us as traders or investors, really not much to do but to watch and see how things unfold. But by and large, I think it's a fascinating moment when we see prices moving around because of the options market. Because I'm an options guy. So I like to watch what's happening in that arena.
CHRIS VERSACE: Excellent. All right, Bob. Well, we'll see how things shape out later today. And thank you so much for joining us and sharing the insight that you always bring. And, members, that's a wrap for the week. Thanks for watching.