Steve Sosnick, Interactive Brokers Chief Strategist, joins Yahoo Finance to discuss today's market action as tech stocks see a sell-off.
ADAM SHAPIRO: But there's still opportunity in this market. And to help us find where the value may be hidden, Steve Sosnick joins us. He's interactive Brokers Chief Strategist. And he is joining us now, as he does often, to help us understand what you've been talking about, which has been in play for at least a week, well over a week, the rotation out of tech, for instance, the big growth stocks to more value. And you don't see that changing, do you?
STEVE SOSNICK: Not in the short term. I think what happens now is-- you know, I originally called this trade the widow maker because, you know, it's such a-- it's such a seductive type of trade. You want the value stocks. You know, they seem cheap relative to the growth stocks. But for years the trade hasn't worked.
And that, you know, the widow makers are the trades that seem to make logical sense, but don't actually ever really pan out. For the first time in quite a while, they've started-- this trade has panned out, and it's been working well. The question remains as to whether-- whether it continues to work is you're into a seasonable-- seasonal pattern where investors get a bit more conservative into year-end.
Do they take gains in the big-cap tech stocks? If they do, that money likely flows into the value stocks. Bearing in mind that Apple's market cap is roughly the same as the Russell 2000, so if you start to have money flow out of those giant tech stocks, it can flow into the more conservative lower PE, higher dividend paying shares that people may want to be looking at because they haven't been for years.
SEANA SMITH: So Steve, does your best case or your best assessment then at this point, do you think that it's going to stick? I know you're saying that there's a lot riding on it and seasonality, maybe it's not the best pick at this point. But from what we know now, we have a little bit more clarity, we got the good news yesterday from what we heard from Pfizer, I mean, is that enough conviction for you to be buying some of those cyclical names now?
STEVE SOSNICK: I think so. And the reason is, you know, we're fretting about the long bond, whether that makes it over 1% or not. If you want yield, this is your place to get it. You know, you're looking at-- you're looking at some of these consumer discretionary stocks that are paying 2%, 3%, 4% yield. They have the cash flow with which to cover said dividend, which, you know, dividends are nice, but you really have to have a company that's able to afford to pay for them. A lot of these companies can. I can't give specific recommendations, but what I can say is, you know, there's nothing wrong with putting your money into a safe stock. It may not be the sexy pick. But if you want some income, if you want to sleep better at night, that's probably your place to go. And I think there is some-- some validity to that idea.
ADAM SHAPIRO: When you say fretting over bond yields, I mean, I'm looking at the 10-year, and it's almost at 1%. But no one expects, if it does cross that threshold, for it to stay there that long. You would expect the Federal Reserve to step in, wouldn't you?
STEVE SOSNICK: I'm not so sure they do. I mean that's sort of the talk in the marketplace, oh, the Fed's going to get spooked if it goes over 1%. To what end? Long bond yields are at a record low. So what this is telling you is despite the pickup in-- despite the pickup in the government 10-year, even the least creditworthy companies are having money-- having no trouble getting their positions financed.
So yes, it could have a little bit of a negative effect on the housing market. But also remember, the Federal Reserve is responsible for the banking system. The banking system does better when there's a little bit of a yield curve spread because they're essentially borrowing short and lending long. Think about how they do it with time deposits versus mortgages.
I don't know that the Fed is going to ring this alarm bell. Yes, it's a big psychological level if we get to 1%. I'm a little more skeptical as to the wisdom behind this. You know, this-- this theory is out there, and I'm going to push back on that a bit.
SEANA SMITH: Steve, I want to ask you about [INAUDIBLE] you. Mentioned in your notes. Right now it's trading just around 25, so significantly lower than that pre-election action that we saw when it was up just around 40. You say, though, that the VIX is not signaling an all clear just yet. What are you reading from the VIX recent move then?
STEVE SOSNICK: Well, let's say-- you're right to point out that we've come down a long way. We were about 40 before the election and, you know, people were genuinely fearful. And 40 is a level you really can't sustain. On the other hand, 25 is a level that's historically quite high. And what I tend to look at a lot are the VIX futures curve, because that's basically not only what the current VIX is, which is [INAUDIBLE]-- and I always want to stress this-- that's the market's 30-day look ahead of where they think volatility will be over the next 30 days.
So a 25 VIX implies that there's about 1 and 1/2% daily moves in SPX for the next 30 days. That's the average. The interesting thing is the futures are more or less dead flat around the 25, 26 range. So that is saying that the fixed futures are expecting, more or less, 1 and 1/2% moves up or down for the next-- more or less for the next nine months. That's crazy. That's very, very high.
We are seeing a lot of traders buying puts in the VIX, basically saying the VIX will come down in February, March, and beyond. But as of now, the futures remain stubbornly high, and that's telling me that there's some real uncertainty. And the peak VIX levels are in December and January, around the time of year-end and inauguration.
ADAM SHAPIRO: And just in time for Christmas. Steve Sosnick, good to have you here. Thank you very much. Steve is Interactive Brokers Chief Strategist.