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Bear market: ‘Don’t be fooled’ by short rallies, strategist says

Interactive Brokers Chief Strategist Steve Sosnick joins Yahoo Finance Live to discuss Netflix earnings, market volatility, bear market rallies, monetary policy, and the outlook for the Fed.

Video Transcript

- Welcome back to Yahoo Finance Live, everyone. As the Fed embarks on a series of rate hikes to slow decades high inflation, the dollar has strengthened, prompting an earnings season of foreign exchange related impairments. But is a modest decline in the US dollar enough to sustain a bear market bounce for equity markets?

Let's break this down further here. For more, we bring in Interactive Brokers chief strategist Steve Sosnick. When we think about all of this-- and first, great to see you in person here with us on set, Steve.

STEVE SOSNICK: Absolutely. Thanks, Brad.

- When we think about the recent US dollar activity and specifically the Fed tightening path that we're on right now, what would you say of the broader kind of socially acceptable volatility that you've seen within the broader calculus here?

STEVE SOSNICK: I'm glad you I'm glad you used that term. I've been trying to get that into popular conversation, me and my friend Steve Sears. What we saw yesterday was socially acceptable volatility.

Volatility, we all freak out, and rightfully so when you see a 2%, 3% down day. Oh, you know, what's wrong? Yesterday, we saw basically a 2 and 1/2% to 3% up day and, oh wow, what a great day. So that's still volatility.

As someone who's traded options for most of his working career, volatility works in both directions. It's a mathematical calculation. You go up, you go down by a certain percentage.

But when we go up, psychologically, it feels so much better. Let's be honest about it. So that's why I like to call that socially acceptable volatility.

The other term, which is not as polite, is it was a bear market rally. We're still in a bear market. We still are seeing the Fed as a headwind.

And so to that extent, that becomes problematic. And so we really have to see if this was a one or two day wonder. I mean, we had two out of three very good days so far. Let's see what happens going forward.

- One of the other buzzwords surrounding, you know, besides dead cat bounce or bear market rally or whatever we want to call it, is capitulation, right, which is something investors look for before we can see a more substantial rally. And there seems to be some debate over whether capitulation has happened. We got the Bank of America fund managers survey yesterday that seemed to show that bearish sentiments at very elevated levels. Then you get Sanford Bernstein coming out today saying capitulation hasn't happened yet. How do we know when it's happened?

STEVE SOSNICK: First and foremost, when people like you stop asking. I don't mean to be rude, but--

- We've given up all hope, and that's when capitulation has happened.

STEVE SOSNICK: Actually, yes, that's exactly it. And we haven't given up all hope. So the fact that I get asked this frequently is-- means that people are-- that's another way of saying, you know, when do I come in and buy?

The real capitulation happens is when people say, oh God, I don't even-- don't even talk to me about this anymore. None of us really want that to happen. That's not good for any of us at this table and watching.

But that's the real capitulation. I think we're away from that. Now I think we're very short term oversold, which is why we had the bounce. I think we even medium term oversold by some of the measures that you stated a second ago.

And that's why you can persist for a little bit. Bear market rallies can be short. I call them short, sharp, and ferocious. You can get them.

You know, you can get them. They can persist for a little while. But ultimately, you know, ultimately, we haven't changed the monetary backdrop in such a way that makes me think we're ready to see a lasting rally.

- So it sounds like you're saying don't be fooled by these short, ferocious rallies.

STEVE SOSNICK: Don't be fooled. It's tough not to-- it's tough. Don't be seduced by them I think is probably the word I would use.

But also, don't fight the Fed. It worked for us so well for so many years. What are you doing now if you're going to go all in?

You could be tactical. I think that's very important to be able to be tactical, and nimble. But right now, most-- you really don't get bottoms until or unless you see some sort of change in fiscal or monetary policy. I don't see that right now.

- You study a lot of data, Steve. Are you seeing any surprising moves right now, things that have caught your attention and made you go, hm, in the past week? Sector, stocks, you name it.

STEVE SOSNICK: I think the thing that's made me go, hm, the most is the positive-- is that earnings are being taken with a glass half full approach right now.

- Positive reactions post--

STEVE SOSNICK: Yeah, think about it. We've had some negatives, but they really haven't caused us to stumble. I hate leading with banks.

I've called them the cocktail hour for the earnings season because they're really somewhat irrelevant except for psychology. JP Morgan was down a bit, but Citigroup rallied 15%, and then JP Morgan caught up. Yesterday, IBM earnings, IBM earnings kind of tend to always stink. But they were down, and nobody noticed.

You were talking about Netflix earlier. Netflix is doing-- Netflix is getting a positive reaction to some mediocre news. So I think that, to me, is the most interesting factor. At least as of now, the market is being able to shrug off bad news better than it had been in the last two quarters.

I mean, think of what we did to Amazon and Meta and Netflix twice before. So being able to shrug that off and being able to take reasonably good news as a fairly decent positive. That's a good psychological factor right now.

- Markets will price in a recession well before it actually happens in reality or even technically. So with that in mind, how long do you expect people to stay or portfolios to stay as defensive as they are right now?

STEVE SOSNICK: I think until we really see where the end is in sight. I've asserted that the Fed actually raised rates in a recession. I think you don't know that you're in a recession until it's hindsight.

I think the NBER will probably not say that we're in a recession, but I think the GDP numbers that will come out next week will say that we have been with two consecutive negative quarters. The Atlanta Fed now, GDP for the second quarter is negative, and we had a negative first quarter. So the question is, though, we're sort of doing too well to be that major recession that's going to get-- that's going to change policy.

Actually, again, this is one of these careful what you wish for things. But a real negative reaction, I think, gets a policy change. I think sort of a growth recession like we're seeing, sort of a modest recession with a lot of inflation, isn't going to change things right now.

- All right, well, we appreciate that little bit of optimism. Interactive Brokers chief strategist Steve Sosnick, always good to see Thanks for coming in to the studio.

STEVE SOSNICK: My pleasure. Thanks for having me.

- We'll see you soon. Take care.