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Evergrande's debt problems are not on the same level as Lehman Brothers: market strategist

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Steve Sosnick, Interactive Brokers Chief Strategist, joins Yahoo Finance Live to discuss the latest on China Evergrande's debt concerns.

Video Transcript

- Steve Sosnick, chief strategist at Interactive Brokers. Always has hot takes and all the answers on all things markets. Steve, good to see you here. I'll put the question to you. Is what's happening at Evergrande, is it a liquidity type Lehman event in your view?

STEVE SOSNICK: Good morning, Brian. In the US part certainly. In the US. No, I mean, as of now, I would not say that this is the kind of thing that-- that has the-- the potential for global contagion. Remember-- in that same way.

Remember banks and brokerage firms are all interlinked in ways that we can't see and with high leverage. Yes, this is a highly levered real, real estate developer. Yeah, there's going to be people who are going to be licking their wounds who've lent money to this company.

And as Julie mentioned I think there's-- there's going to be implications for both employees and local Chinese customers and other constituents there, which by the way I think those will probably be the ones most likely to get some sort of assistance from the Chinese government based on what they've been doing in terms of trying to like equalize things. Basically reminding everybody that there is the Communist, there's a Communist Party in there.

And so I don't think-- I think there'll be definitely some people hurt. But I don't think it's the-- I don't think it's the type of global contagion.

You know, you alluded to what you were doing during the global financial crisis. I was making markets on bank and brokerage stock options. And I could not keep the volatility high enough to keep us from getting short and in real trouble. That was not the kind of day we saw yesterday. This was a more garden variety type of sell off. And you've alluded to many of the reasons, you know, in the upcoming as you spoke earlier.

- Yeah. And I think also there was sort of a freezing in the credit markets on that side of things during the financial crisis that is just not happening right now. Let's bring it back here to the US then.

Because we've been talking for weeks about the sort of vulnerability to a correction. That's something that strategists have been flagging. And you and your note to us this morning reference the moving averages for the S&P 500 that we I believe went below the 50 day moving average yesterday.

But we bounced off the 100 day moving averages. When you look at a chart like that, what does that tell you?

STEVE SOSNICK: Well, what it tells me is that-- that ultimately, you know, these big numbers, whether or not you believe the technical analysis is correct, or whether or not you believe it's just self-fulfilling prophecies. Well, there's something to be said for self-fulfilling prophecies if you're trading, and you use these numbers as guidelines.

Because if you look at the chart that we're showing now, you'll see that the 50-day moving average has provided really terrific support. Pretty much since November. Traders tend to use that as a guide. And yesterday when we broke through, there were probably some stops that were triggered.

I don't think it's a coincidence that this all happened. The Monday after a quarterly expiration when there's a lot of what I'm going to call it grinding of the gears, sand and the gears as people try to get their hedges back in order because you don't necessarily on expiration have full control of where your positions are if you're short. Options going into them.

And so the logical thing to say would be, OK, where's the your next stop? Your next stop is your 100 day moving average because that-- that has been the major support when we've kind of run into trouble in the 50.

But these are moving averages that are pointing up. What that means is when you have moving averages that are pointing up, by definition, you're in an uptrend. Your uptrend trading model is you tend to buy dips and sell rallies. That doesn't mean it always works by the way.

Let me be very clear about that. That was-- but that was the move that was in place yesterday. Once I think people started to realize this may not actually be a contagion event and just sort of, hey, you know, as Bryan was saying, we're a few off the highs. We've been waiting for this. We've been wondering when this was going to happen. So that was the logical spot.

Now we're seeing some people trying to buy the dip this morning. Actually, they bought the dip of 3:30 yesterday afternoon when we rallied about 40 points in the spruce from the lows. And let's see where it takes us today.

- Steve, I'm wondering in terms of timing. Does the fact of the epigram crisis happening right now? The fact that this is an issue of leverage in China change anything do you think for the Fed in terms of its signaling at the end of its meeting? Once we get that policy statement, and press conference from Fed Chair Powell tomorrow.

STEVE SOSNICK: I certainly expect that question, Emily, from somebody how does this impact your thinking. I think a lot will have to do on what they've decided, you know, to do in their statement.

I think if I were at the Fed now, I'd be really very carefully assessing whether or not there is global contagion that could come from something like this. But I don't think, you know, as long as the scenario plays out the way that-- that-- that most people think it is, I don't think this is going to have a huge impact on monetary policy.

I'll actually argue that this is the result of these kind of monetary policies, where you have all kinds of where the global search for yield amidst-- amidst a tsunami of liquidity. I think has led to some bad investment ideas.

And this kind of reckoning you get. I think they want to manage the reckoning process because you'll find that there will be other situations. It would be irresponsible for me to throw any out there. I don't even know what they would be.

But there will be some. It's inevitable. There always is some after a period of excess.

- So Steve, let's-- let's dive into those investment ideas without specific names. And we have a lot of people that are waking up this morning. And they saw the major indices really get hammered yesterday, and likely they're concerned ahead of a lot of events.

Fed meeting, debt ceiling, you name it going into this end of the month. Is this the environment where they cash out of cyclicals rotate into dividend payers, utilities, you name it? Or do you think we're on the cusp of all of these stocks selling off?

STEVE SOSNICK: I think right now, as I mentioned, we're still technically in the uptrend. So until or unless you really see the 100 day moving average get tested and break, I think we could still argue that, that it's not the tight, you know, to run for the basement and get an all cash if that's not what you're inclined to do.

Obviously, everybody's risk tolerance is different. I've been saying all along that, that I think there's-- there's a certain ballast when you hold a portfolio that's got, that's yielding dividends with dividend yield.

Because you know, assuming, of course, that the companies have the cash flow to pay for those dividends. That's the big caveat. But I think for, you know, their boring portfolio.

But sometimes boring is good. This may be one of those times where boring is a bit better. Also because if you do fear that there's this get me out type of trade, those are the ones that tend to be OK because you're not finding people heavily over invested in them.

And thus, making them less susceptible to a rush to the exits if you fear one. And in the meantime, you're getting paid to own them.

- You know, Steve, I want to put that question together with the Fed question and ask given the last 24 hours we saw in markets, does this suggest that stocks are more vulnerable to a so-called taper tantrum than they were not? Because of ever grand fundamentally, but more because of what that reflected about the sentiment in the market.

STEVE SOSNICK: Yeah, Julie. I think the psychology is really important. And I think the psychology is a bit more fragile. It could all just be seasonal. This could just be a way to September, you know.

It's the beginning of autumn. This is usually a very rocky season. There's a lot of people who have a lot of performance that they're incentivized to lock in going into the end of the year. You know, if you've been fully invested, you're up-- you're up double digits.

You know, even if you just help index funds. And that's the kind of performance that I think a lot of people don't feel averse to monetizing. Remember-- so remember also the monetary picture's changing.

I don't think the taper in and of itself should be that significant on the money, on the money side. But in terms of on the psychology side, it can be huge. Just the act of taking the Fed's foot off the proverbial accelerator could be enough to sort of rejigger people's perceptions on how robust the liquidity flows are.

A lot of what we've seen is liquidity dependent. A lot of the multipole expansion we've seen is liquidity is somewhat liquidity dependent. And I think if you're starting to get the sense that, that this liquidity wave is abating, then that yes, it could have some real psychological effects.

We're definitely a bit more fragile. I wouldn't say completely, completely fragile at this point. We just-- we actually had a momentary dose of reason over the last few sessions.

- Well, I certainly we had questions on this complicated area. And as no surprise, you had the answers. Interactive Brokers Chief Strategist Steve Sosnick. Happy trading. We'll talk to you soon.