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Why Robinhood’s stock was destined for the ‘meme treatment’

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Interactive Brokers Chief Strategist Steve Sosnick joins Yahoo Finance to discuss the July jobs reports and Robinhood after stockholders filed to sell 97.9 million shares over time.

Video Transcript

MYLES UDLAND: All right, let's stay on the markets and talk a little bit more about everything happening, not just on the back of the jobs report, but also the churn we've seen over the last couple of weeks. Steve Sosnick joins us now. He's the chief strategist over at Interactive Brokers. Steve, great to have you on this morning. Initial thoughts on what looks, at least from my vantage point, like a pick-up here for cyclicals kind of taking the lead on the back of that jobs report

STEVE SOSNICK: Yes. Well, good morning, Myles. Yeah, I think that we're going to get a little bit of a change in leadership. We're seeing, you know, the futures sort of trying to digest it this morning. But with NASDAQ lower, generally lower, and they've been trading with bonds, and we can get into that relationship, but they don't like the higher bond yields. But I think there's a lot for economic bulls to like because it turns out the economy is strengthening, as we were expecting. But the Fed isn't ready to do anything about it yet, so the bonds-- so stocks aren't freaking out about it. So you've got a pretty good spot.

The psychology right now coming into this, I thought, was a bit of, heads, I win, tails, I win anyway, which was if the number was weak, well, that's OK for stocks because the Fed is going to continue to pump money in. And if the number's strong, well, that's good for stocks because the economy's good and that will help company earnings. The psychology is such that right now the market will pretty much take anything and figure out a way to run with it.

BRIAN SOZZI: Steve, why is the NASDAQ, why is it under pressure here in the premarket?

STEVE SOSNICK: Well, Brian, the reason now is it's actually a strange sort of second order technical thing as much as anything else. Traders have got it in their heads, and probably in their algorithms as well, which is, if you see bond markets higher, sell NASDAQ. I mean, this is, you know, it's second order, but the logic is that if you have higher bond yields, you're discounting your cash flows at a higher level. So therefore, that hurts your valuations.

Now, why these NASDAQ stocks actually start to care about valuations at these crazy levels, who knows? It's also partly rotational because, you know, there's better things to do with your money, theoretically, which would be something like going to XLF when you see the yield curve steepen because there's a more direct relationship between financials and the yield curve.

You know, I think that this relationship between bonds and NASDAQ started somewhere late first quarter, mid-second quarter, as it was sort of as much correlation as it was causation. But once it gets programmed into traders' mindsets and their algorithms, it becomes causation as much as anything else.

MYLES UDLAND: Well, Steve, let's talk a little bit more about what we've seen in earnings season, particularly over the last couple of weeks where we've had-- [CLEARS THROAT] Excuse me. We had some really strong numbers, but they've been followed up by muted, if not outright negative, reactions from the market. How are you thinking through just the way that individual companies have kind of been punished during this season? But overall, I mean, we're basically at record highs here. We'll see exactly where we shake out today.

STEVE SOSNICK: To some extent, Myles, I'm going to say they out kick the coverage. You know, I think that the analysts-- the analysts, I don't want to pick on them, but they undershot again. It was a tough quarter probably from their point of view because the comparisons were so outrageous. And I think in a lot of the biggest stocks you've had such great momentum that it took-- it required perfection. You needed everything to go right for the stocks to react well because so much had been priced into them.

Now, also, to be fair, it's not exactly as you noted. Like, we're really selling off here, or we're flirting with all-time highs on most of the major indices. But, to some extent, I think that these things ran a little hot into earnings. Some companies have been punished when they haven't said what the market wanted to hear. But overall, when you step back and look at it, it's been a pretty good quarter, just some potholes here and there.

BRIAN SOZZI: Steve, I know you've been watching the overall activity in Robinhood this week. It has a wild week, to say the very least. What's your take?

STEVE SOSNICK: Oh, I knew we were going to go there, Brian.

BRIAN SOZZI: Because why not?

STEVE SOSNICK: Of course. You know, it was funny because it really did become-- the meme came into play and fizzled in, more or less, record time. I guess, you know, it really shouldn't have been a surprise that Robinhood could get the meme stock treatment. Because when you think about it, what was the vehicle used to play the meme stock rally by a huge number of investors? Robinhood. So it would fall into play that they could become a meme.

I think the most outrageous thing was that it just shows-- because the stock rallied first on the prospect that they were going to be listing options the next day, and then because they listed options on Wednesday, that was absolutely phenomenal. That is the market signaling that they understand this concept of, I'm going to call it the gamma squeeze, you know, where If enough people get on one side of a trade, particularly buying calls, it can actually force a stock higher. Without getting into the math, I'm just going to say a lot of ants can move a very big log if you do it. And we saw a huge volume, about 80,000 contracts trade, in the August 70 calls.

Now, the problem with some of these meme stocks are that they meet reality in a bad way. And that was, you know, individual investors were dissuaded from selling their-- you know, there were disincentives, but not outright prohibitions on them selling their allocations. But meanwhile, there was not a lot of prohibitions against insider selling. And so that came very quickly. I don't blame the insiders because if the stock is trading twice where you were willing to sell it a week ago, of course you're going to want to sell it now. But I think that that harsh reality hit very quickly.

And so this was-- you know, the meme stock trade in a microcosm, up and down. It was pretty wild. And we're seeing the stock trading a bit higher this morning, as you just showed. You know, we'll see where it goes. There's a lot of stuff that's got to get resolved, but I think you can-- this is the biggest, you know, the greatest distillation of the meme stock situation that we've seen. All unwinding in about a three or four-day period.

MYLES UDLAND: Yeah, and then, Steve, just finally before we let you go, thinking about the broader options structure, which you sort of suggested towards there, I mean, has that fundamentally changed? Is there better liquidity, worse liquidity? Now that there is this sort of awareness from a new set of investors that the options market itself can create outcomes in the common that perhaps folks had not previously-- you know, pros knew this, but the masses are kind of now just getting on to this idea.

STEVE SOSNICK: Well, you know, the pros didn't really see this very much either. We knew this was a theoretical concept, but it wasn't necessarily something you saw in practice very often. You know, I think, in general, option market liquidity, in terms of liquidity providing by professionals, has been impaired, right? I don't want to-- we could take an hour to go into this and bore everybody. But bottom line is there's enough liquidity in terms of people on both sides of the trade. I mean, if 80,000 contracts trade, there's a buyer for every seller and vice versa.

But I do think that the professionals have realized, basically, when you see the tsunami coming at you, you get out of the way. And I think that it becomes self-fulfilling because if I see-- if I'm selling calls, and I know that it's just unrelenting, I'm going to over hedge. I'm not going to hedge. I'm going to over hedge. And that's going to feed right into that feedback loop that everybody's a part of. And that's why these stocks shoot further and faster. I just think it was crazy that the market is so hip to it that we were up on Tuesday, in advance of options trading, and then just leaped higher as soon as the options came on board.

MYLES UDLAND: All right. Steve Sosnick, Chief Strategist, Interactive Brokers. Steve, appreciate the time this morning. Have a great rest of the summer. I know we'll talk soon.

STEVE SOSNICK: Thanks, Myles.