VIDEO: S&P Levels to Watch, Volatility, and What Wall Street May Be Missing

JD DURKIN: Good morning, members. With me today is AAPT member Bob Lang to help us dive deeper into the technical landscape. Now as a reminder to all of you watching at home, Bob’s analysis might not always perfectly match-up with other views that you have heard this week, and this is all about bringing you multiple perspectives, in addition to Chris’s, of course, daily management of the portfolio itself. So Bob, I think, my friend, we have to kick things off with one of our most frequently asked questions, and it is in regards to S&P levels. What levels for the S&P are you watching, Bob?

BOB LANG: Well, the important level right now, JD, is 4,100 on the S&P 500. This was penetrated yesterday on the close. It seemed like we were going to get a nice weekly close– another weekly close above that 4,100 level yesterday, but we got rejected the last hour, hour and a half with some pretty intense selling.

So if we close the week below that mark, it means we are back in the range. And likely on the low end of the range is 3,600 on the S&P 500 and the above mentioned 4,100 to the upside. The week started out strong, but it may be fizzling before this three-day holiday we have coming up here.

Interestingly enough, though, JD, interesting stat here. Last Friday, the S&P 500 closed exactly at 4,090.46. Yesterday it closed at 4,090.41, so a nickel differential in about five days. It’s like nothing happened from then to now.

JD DURKIN: Yeah, absolutely. And of course, a lot of people think that by the end of the year the S&P will be at 4,000, which means there may be a whole lot of nothing that happens between now and the end of December, but that’s many storylines and many conversations away. At the beginning of this week, Bob, you chartered the S&P 500 on AAP. You noted, indecision is running rampant. What led you to say that and do you still feel the same as we head now into, finally, a three-day weekend?

BOB LANG: Well, it’s an odd time for the markets right now, JD, and with such a good start to the year, many are worrying about missing out on that upside. And if they miss out on that upside, how much further is the market going to go before they have to make a commitment and put some money to work?

Momentum is really strong and it’s difficult to know when to get on that train, but of course, if we move south and move down towards that 38, 33,900 level and talk about the 50-day moving average, which is way down there, about 3,950 right now, people are going to regret having to put money– putting money in. But you know that the momentum of the market has a tendency to drag people back into the market even if they don’t want to do, kicking and screaming, so to speak.

JD DURKIN: Is there anything else that’s been catching your attention this week? And I wonder if you think that there’s anything that Wall Street might be missing, Bob.

BOB LANG: Yeah, bond prices are falling, and which means that yields are on the rise. You know that two-year Treasury yield is up near 5% now, near the 10-year yield is near at 3.85%. Now what does that mean?

It means the interest rates have been rising, bonds have been selling. That 10-year yield that I just mentioned, the 3.85, JD, is up near the December level, which peaked at 3.9 towards the end of the year, and it came tumbling down. A lot of people have thought that inflation was starting to recede.

Strikingly, that inverted– the inversion of the yield curve, which a lot of people talk about, remains high, even after so many rate hikes over the past 11 months. It’s truly remarkable, though, the message of the bond market is one of, slow down, Fed, take it easy, stop on the rate hikes. But we know the committees are really not listening to that chatter.

We have the minutes from the Fed coming out next week, JD, on Wednesday. So we’re going to get some more clues. In addition, a couple of Fed speakers today will be on the days talking about inflation and probably talk about Fed policy, economic data, that sort of thing. So we’ll be paying attention to that a little bit later on today.

JD DURKIN: Yeah, and certainly as we heard from Mr. Bullard of St. Louis earlier this week, when any Fed official speaks, everyone eagerly listens. Of course, we have to check in on volatility while we have you, Bob. And for that, we have a member question. We’re seeing the VIX move higher on the day. What does that recent dip overall tell you about the market’s next direction, do you think?

BOB LANG: You know, JD, VIX is really hard to explain these days. I mean, if we go back to the November CPI report, remember, that was the one that really surprised everybody and came in a lot lighter than people were expecting. The market shot up that day over 6%.

We noticed a change, volatility selling on the news. So every time we’ve had some news event happen, the CPI, the PPI, some retail sales, the Fed, some Fed news, and so forth, we’ve seen people selling a pop in volatility. And what does that basically mean? When you’re selling volatility, you’re not fearing that the markets are going to go down. And we match that trade up with a long futures trade.

So we’ve seen when volatility has been coming in, JD, we’ve seen people picking up the pace and starting to buy futures and covering those– covering those bases as well too. And without any fear of the markets dropping due to any news, like we had yesterday, we saw the markets drop hard yesterday and rally back, only to get shellacked in the last 90 minutes. With the VIX dangerously low, here, JD, at around 20%, there is substantial risk of recent buyers of stocks, especially in January, come out of the market and start to sell.

JD DURKIN: All right, now outside of the tactical landscape, it’s been a busy few weeks for the Central Bank, to say the least. Anything– if anything is certain, we can pretty much guarantee that people will continue to cling on to every word from every Fed speaker breathlessly because that’s what we do. As a long-term watcher of the Fed yourself, what has stood out to you and what will you be most closely following in the weeks ahead?

BOB LANG: Well, I pay attention to every single speaker of the Fed. I’m kind of a Fed nerd when it comes to that, and how they’re positioning themselves. That said, we need to take their words in stride and realize that they’re presenting a united front.

And that said, we need to clear– be clear that it’s going to be higher rates for longer. If and when they adopt– the market adopts the same view is going to be is a mystery to me, actually, but the Fed is clearly not there to support stocks, move stock prices moving higher. In fact, you know what, they would probably welcome the markets dropping a little bit because they do see some challenges along the way.

JD DURKIN: Yeah, of course, for more on the Central Bank, please check out Chris’s latest alert. Bob, while I have you, my friend, we do want to wrap up with one final member question. Can we get your latest thoughts on gold?

BOB LANG: Yeah, gold is one of my favorite investments right now. And I know the stock, GLD, we have that in the actual plus portfolio. GLD, or gold, really rose sharply towards the end of last year from October to the end of December. 22% rise in the metal in 2 and 1/2 months, pretty unprecedented move.

And we made a sharp move up in the gold futures to about 1,950 or so, and tired out. And we pulled back a little bit, kind of consolidating around the 1,840, 1,860 level. If we get back above that $1,900 an ounce level, I think it’s going to be meaningful. We’ll see higher prices in the future for the yellow metal.

JD DURKIN: I will continue to follow them all very closely, Bob. Thanks a lot for being here. Great to see you again.

BOB LANG: Happy holiday, JD. See you next time.

JD DURKIN: Absolutely. Happy President’s Day to you as well. Have a fantastic long weekend to all of you watching at home. And we will see you next time.