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Markets 'desperate' to rationalize rally: Strategist

Steve Sosnick, Interactive Brokers Chief Strategist joins Yahoo Finance's On The Move to discuss the market rally in relation to covid vaccine news.

Video Transcript

JULIE HYMAN: As we look at these various therapy and vaccine developments, it did seem like, at least out of the gate this morning, that it was benefiting stocks. And that's something we've seen in the past. Are investors, also, though, paying attention to these sort of nuances that Anjalee was talking about, the questions about effectiveness?

STEVE SOSNICK: I don't think so. Because I think the markets are just so desperate for something to rationalize the momentum. And I think, you know, one more piece of good news on the virus front-- let's be clear. We all want good news on the virus front.

But what you-- if the market were acting more rationally, you would have seen-- let's say some outperformance in some of the more beaten down value names and some underperformance from the "stay at home" type of names. We have started to actually see that reverse a little bit in the past few minutes. But this morning, we were coming in seeing the leaders still being what I would call the left side of the heat map-- you know, the giant mega-caps that led us the whole way through. And so that's what kind of makes me think that this is-- that the virus-- the vaccine news is more of an excuse for a continuation of the rally than something new and fundamental from the market point of view. Let me not profess anything from a medical point of view.

JULIA LA ROCHE: Hi, Steve. It's Julia La Roche. Always great to be with you.

You had an interesting point that I would like to explore a bit more. A lot of this in the-- well, a lot of what we've seen in the markets has been predicated on the fiscal side of things, the fiscal stimulus. And you analogize it to the Fed put. I was hoping you could unpack that for us and explain, what are the implications of that?

STEVE SOSNICK: Well, thank-- thanks, Julia. What I would say here is, we've been conditioned to think that two of the requirements for the continuation of the rally are-- well, some of the requirements. But one of those includes fiscal stimulus-- fiscal stimulus package.

And it's clear that nothing is coming. At best, it's described as a stalemate. At worst, they're, you know, 2 trillion apart or a trillion dollars apart.

And so how do you rationalize the fact that a market is going up in the face of this lack of a positive development? And the way I would look at it-- the only way I can rationalize that is that, if things get bad enough, they will be spurred into action. In an election year, it's usually good politics to give money to people. So both sides, I think, would ultimately want to be perceived as doing something.

And I think that's where the market's transitioned to now. If things get bad enough, well, then maybe Congress will leap into action and-- or, more accurately, be, kicked and screaming, dragged into action to do something. But the problem, when you think about it in terms of a put scenario, is, we don't know what the-- we don't know what the timing is. I don't know the expiration date. I don't know the strike price, which makes it a lot-- a lot less protective, let's say, than a normal. But I think-- I hope that gets the answer of your question, Julia.

BRIAN CHEUNG: Steve, Brian Cheung here. So to loop back to the beginning of our conversation here, when we talk about the plasma treatment news and where markets are going right now, I guess I'm wondering, are vaccine and, I guess, health-related headlines the new Larry Kudlow soundbite circa the US-China trade war at the end of last year, at the beginning of this year? Is this the overall narrative that we should be watching for if stocks do end up driving higher over the next few months?

STEVE SOSNICK: I love that analogy. Yes. I wish I'd thought of it first, Brian.

Because basically what happened-- you know, think about how the futures were spiking. Or you know, let's say early this year, late last year, there would be some unsourced story about positive developments on the China trade fronts. And the Spoos would bounce overnight. And then we would sort of pick up where the-- where the overnight session left off.

What's actually interesting about that, by the way, IS we've kind of lost sight of the fact that they've ripped up phase one of the China trade deal. But let's look past that as well. But I think that analogy is very-- is very appropriate. I think that, when the markets are moving-- when you see momentum like this, I think markets grasp for a rationalization rather than really react to something fundamental. And I think, yes, this is that type of news that we're seeing, or reaction that we're seeing.

JULIE HYMAN: And Steve, finally, I want to get a little specific with you. Because I do want to ask you about the two stocks that are splitting, effective a week from today-- the close a week from today. That's Tesla and Apple, of course. And we've seen this bid up.

In a way, it's sort of representative of the recent market action, right? This enthusiasm for these companies without anything really specific, besides the split. What do you think-- what is that telling us? What is that narrative telling us?

STEVE SOSNICK: Well, at worst, it's a return to the bubble era. Because that was one of the games that people played, is, what's going to split next? What's going to split? Let's jump-- let's jump in here.

Ultimately, a split is, in the case of Tesla, I have a $50 bill, and I'm going to give you five tens for a 50. There's some marginal utility to you getting five tens. You wouldn't have asked me for the change otherwise.

But in reality, it doesn't-- it doesn't do anything to the fundamental value. It's still $50. And I think what we're seeing now is, we've seen such momentum driving markets. We've seen such individual participation, which, by the way, has never been easier.

Because you can do fractional shares and all sorts of other things. You know, odd lots are not discouraged. But regardless of that, I really have to worry whether we are setting up a "buy the rumor, sell the news" type of scenario.

Because the moves that we've seen-- what has changed fundamentally-- I'm not even going to touch Tesla, because the fundamentals have ultimately very little bearing on that stock. But what has changed fundamentally in Apple that has, you know, caused it to rally, give or take, 20%, based on the fact that you will now have, you know, four pieces of stock for the same individual piece of stock? That is going to be very interesting to watch going into next week, as we see if there is indeed a follow-through or if this was, in fact, a run-up.

JULIE HYMAN: We'll find out after the close on-- Monday is when those puts are effective. So Tuesday is the first day that we will see them trading on a split-adjusted basis. Steve Sosnick, it's always great to get some time with you. Interactive Brokers chief strategist. Thank you.