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Stock market: ‘We have to be very careful about the hard landing,’ strategist says

Interactive Brokers Chief Strategist Steve Sosnick joins Yahoo Finance Live to discuss the Fed's impact on markets and the return of meme stocks.

Video transcript

AKIKO FUJITA: We've got Steve Sosnick, Interactive Brokers chief strategist. Steve, let's kick things off. It's on a Monday, right? With where the markets are, I mean, we're coming off of four straight weeks of gains. Obviously, China's data today coming out, weighing on investors, as we see red arrows across the board. Where do you think we are in the cycle?

STEVE SOSNICK: Good morning, Akiko. I think we're sort of in a part of the cycle where we have to be very careful about the hard landing. You know, you guys just spent the last few minutes going over a series of indicators, or a series of related stories that don't paint a good picture for the economy and certainly will not be helped if the Fed continues to be on a path about fighting inflation, which I don't-- I'm not suggesting that they don't need to be on that path. But it becomes inevitable.

One of the problems specifically with China that, you know, today I think it's being taken almost as a positive by the markets because, you know, Chinese-- if Chinese demand is slowing down so dramatically, well, of course, that's going to impact commodity prices negatively. There's a lot of people who have-- you know, people, algorithms, whichever, programmed to say, OK, oil down, stocks up. So as a result, we're really not seeing any real giveback.

We've given back the levels more or less of the last few minutes of Friday trading, which in itself was a bit of a ramp. So, you know, I think we're in a fairly precarious time for the markets. And a lot of investors sort of seem to be covering their ears and just doing what they'd been doing before.

- So Steve, that implies, though, that despite all of that, you still see a lot of retail activity. I guess I'm wondering on your platforms, despite Fed concerns, despite uncertainty out of China, despite a perhaps head fake on this bear market rally, people are still diving into stocks. Is that what you're saying?

STEVE SOSNICK: Absolutely. You know, so we are seeing-- it's not-- it's not-- the meme stocks guess are the perfect tell for this. And to a certain extent crypto coming back, testing 25,000's another tell. The retail's back.

One of the most actively traded stocks on our platform, you know, was MEGL, which went from like 7 to 250 and back down to single digits within the course of about a week. You know, you have the HKD loonieness, you know, going from, you know, an IPO to over 2,500 and then large-- you know, giving back about 90% of it. So yes, you know, what I'm seeing overall-- and I keep finding the fact that I'm using this phrase over and over again-- a lot of people are using the playbook, the 2020, 2021 playbook over again.

It was a spectacular playbook for that period of time. But the rules of the game seem to be changing. And people-- for now, the playbook is working. But people seem to be using the same playbook and expecting the same results.

In the short term, I think it's been fabulous. I think it was a great bounce off an oversold condition. But I have to wonder if using that same-- the same investment playbook that worked for you, which includes don't fight the Fed, which in that period of time was, you know, the Fed was your friend-- now, the Fed is kind of a headwind. This is the problem I start to see.

AKIKO FUJITA: I mean, what is the key difference? If you've got retail investors out there who are saying, well, why not go with the same playbook given the gains that we saw on the back of the big declines we saw early on in the pandemic? And what's the key difference? And should they be buying the dip?

STEVE SOSNICK: Well, buying the dip is-- buying the dip is a great strategy. On the other hand, we're up well off-- you know, we're not at a dip anymore. We're well off our lows. You know, looking at the backdrop, I'm not going to criticize investors for having bought the dip. It was the right strategy at the right time.

We were very oversold. We went into earnings with the most dire expectations. And earnings were better than feared, certainly. And that provided a lift. You know, and I think-- but I think the last part of this rally has been the investors sort of taking Powell's neutral comment to heart.

Meanwhile, all the other Fed governors who have spoken since have basically been squashing down on that idea. But now you're in a momentum phase. And so investing just because of momentum, that becomes a bit trickier than trying to time the dip.

The meme strategy worked great for whoever-- you know, the meme stock trading works great if you're early. It works terrible if you're late. We've seen that time and again. You know, those seem to have a shorter and shorter half life in terms of success rates.

In terms of other stuff, you just-- there are plenty of good stocks to be buying out there. I'm not going to-- I don't want to really squash down on this. But just sort of what I saw Friday, you know, the strategy of, you know, instead of don't short a dull tape, it became let's buy-- let's buy at money expiring spy calls. And then as it moved up a little bit, let's roll them up to the next strike and then the next strike and the next strike. That was just pure momentum on nothing. And so that becomes a much more tricky environment to try to base your trading from the long side on.

- So Steve, I mean, when you talk about HKD, you talk about a number of other names that were popping lately, I mean, a lot of people perhaps trying to draw comparisons to what happened in the beginning of 2021 with GameStop to some of the activity that we've seen over the last two weeks. Are you seeing any sort of similarities? And is there a reason for a macro backdrop contributing to that? Or is it completely unrelated?

STEVE SOSNICK: I think the macro backdrop was much more prevalent in early 2020-- I'm sorry, early 2021 because you had, you know, massive Fed liquidity injections and stimulus checks. People-- a lot of investors literally got money deposited into their accounts. You know, now I think it's sort of more of just, you know, we can get things moving in a short period of time.

That aspect of it hasn't changed. That's why I alluded to the idea of people using the same playbook. But each of these moves, HKD, of course, being the exception, but for the most part, GameStop, Bed Bath and Beyond, et cetera, my theory then and now is there was always a certain amount of investor nostalgia to them. People just didn't want to see their old favorite ball stores getting picked on.

And so they went after the shorts. Also, to be said, shorts-- people have been going after the shorts for as long as there have been shorts. So that's also not a change in strategy. The popularity of it certainly is greater.

But, you know, in each of these situations, there's nothing-- there's less organic-- there's less organic nature to it. In the initial meme stock price, you got people coming in who had never invested before putting money into these stocks and investing. Now it seems to be the same cast of characters chasing the same list of names with a couple of new exceptions every so often. That becomes more of a self-contained loop. And it really becomes much more about-- you know, it's always been about timing. But now it's really strictly about being early.

AKIKO FUJITA: Yeah, Steve, really quickly, moving away from meme stocks, what do you like right now? Where are you putting your money?

STEVE SOSNICK: Right now, quite frankly, as a volatility person, I'm starting to look more in terms of volatility plays and getting a bit defensive. You know, the VIX flirting with 20 means that there are more opportunities to be hedging some of your gains. I actually start to think about, like, looking for pullbacks, being a contrarian. I think starting to look at energy is probably not a bad place to go, unless we really feel that China-- the wheels are going to come off in China because it is going to be winter at some point in Europe. And I see, like, another round of stresses coming. But those would be the two biggest places of focus for me.

AKIKO FUJITA: OK, As always, some good takeaways there. Steve Sosnick, Interactive Brokers Chief Strategist, appreciate your time today.