Steve Sosnick, Chief Strategist at Interactive Brokers, appears on Market Domination to discuss the state of the markets (^DJI, ^GSPC, ^IXIC) as Wall Street awaits the Federal Reserve’s next interest rate decision.
A recent chart from Deutsche Bank shows increased call option volume on large growth and tech stocks compared to the rest of the S&P 500. Sosnick expressed concern that “everyone is rushing to buy them because they think the stocks can’t go down. Usually these stocks have weird demises, parabolic moves. Nvidia’s demise was very unpredictable and often ended badly. I’m not saying Nvidia is headed for disaster, but it means that when these big rallies end, there’s usually a lot of volatility involved.”
Market volatility could also be felt this week following the release of the May personal consumption expenditures (PCE) index. Sosnick said the number is crucial because the Fed relies on the data. “The market is pricing in a 2.6% increase year-over-year, but I think that’s because they’re expecting a 1.1% increase. So this definitely supports the de-inflation thesis,” he explained. But if the number was higher, the market could “panic a little bit” and lower its rate cut forecast to one or even none.
For more expert insights and the latest market trends, click here to watch this entire episode of Market Domination.
This post was written by Melanie Leal
Video Transcript
I want to highlight a chart that came to me today from Deutsche Bank that Jim Reid brought up as his chart of the day, which looks at call option volume in mega-cap growth in the technology space, and it’s on the far right side of the screen.
It’s hard to tell, but compared to the rest of the S&P 500, there was a big increase.
Now, Deutsche Bank argues that that could be the reason why the upward momentum has paused, but it is unclear whether the past few days already qualify as a pause.
But what do you think?
How do you interpret this sudden increase in activity?
This is where I start to worry that we might have what’s known as a “blow off” – where one side of the trade continues to trade, so everyone rushes in to buy because they think the stock can’t go down.
Well, these things usually have strange endings, parabolic movements, but with NVIDIA we’ve seen it end in very unpredictable and often messy ways.
This doesn’t mean NVIDIA is going to hell.
But what that means is that when that big surge ends, it’s usually followed by big fluctuations, because when a sure thing goes right, there’s big confusion about who’s going to keep buying it if everyone bought it.
That’s kind of the problem.
I want to change gears a bit.
Some economic data.
Tap P ce Steve.
How important is that?
Are those prints going to be on the market?
very.
Well, that gives me an answer that can’t be answered in one word.
Uh, if we’re talking about the Fed, which is very data-dependent, um, you know, I think the market is pricing in a 2.6% increase year over year, because they’re expecting a 1.1% increase.
So that definitely lends support to the deinflation argument.
Well, 2.6 is not 2.
II, I’m not sure if we really need to get to 2.
I think they follow the policy that unless there are economic issues, it should be two.
Well, so if we see numbers that diverge from that, I think it would change our view on Fed policy.
It indicates a higher number.
I think people are going to get a little scared and say two rate cuts this year, one to two rate cuts, would be better off with zero to one, or none at all.
On the other hand, if the numbers are very encouraging, I think we will start to hear a lot more talk about the Fed cutting rates sooner and more quickly.
Uh, in the same way, you know, we’ve been talking to a lot of people recently who are saying that whether it’s one rate cut this year from a market law perspective, or two rate cuts, or no rate cuts at all, at the end of the day, given how the market is doing this year, it’s important that we’ve gone from 67 expected rate cuts to one or two.
No, there was no difference.
Part of the reason is because the economy helped — I mean, ST, a strong economy and six to seven rate cuts was inconceivable — those are mutually exclusive.
As I’ve said before, given the choice, I would always choose a stronger economy.
Hmm, but would that really be the case if the final interest rate at the end of the year was 5, 4.34 and 3/4, or even 4.5, instead of 5 and 1/4?
What’s the difference?
It’s no big deal.
You see, a risk-free asset called a T-bill can still earn you some positive real rate of return.
Hmm, so the story doesn’t change much.
But I think the markets want to know the direction, and they haven’t minded so far that the direction hasn’t been in their favor.
Nothing changed.
