Bursting with Bubblelicious Energy

Chief Strategist Steve Sosnick joins Andrew Wilkinson to explore the momentum-fueled rallies, surprising resilience to bad news, and the yield curve signals that have some investors on edge. From quirky trading patterns to signs of speculative froth, it’s a timely look at what’s driving this bubblelicious energy in the markets.

Summary – IBKR Podcasts Ep. 263

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson 

Welcome to this week’s Market Minute. My name’s Andrew Wilkinson, and I am joined in the IBKR Studio by Chief Strategist Steve Sosnick. Welcome back to the program, Steve. How are you? 

Steve Sosnick 

I am doing well, Andrew. Thank you. How are you? 

Andrew Wilkinson 

Doing okay, thank you. Markets are up to all sorts. What’s going on? Are we ever going down again? 

Steve Sosnick 

Nope. Apparently not. Nope. Never. Obviously, that’s a facetious answer, but right now, the momentum is so strong—the belief in markets is so strong—that traders, particularly in the U.S., but even globally, because a lot of global markets are hitting all-time highs as well, are just shrugging off any amount of bad news. 

I facetiously put out a rubric on Trader’s Insight: basically, “Up by futures. Maybe get around to brushing your teeth. If there’s an 8:30 number and there’s a dip after that, use it as a buying opportunity. If there’s a 10 o’clock number, use that as a buying opportunity.” 

As we’re taping this today, Monday morning, the 8:30 ADP number—which was pretty lousy—proved to be a buying opportunity. Futures sold off, and then opened higher. 

As we’re taping this now, the ISM numbers just came out. They look truly, astonishingly bad—at least at first glance. I’m sure the market will treat that as a buying opportunity later this afternoon. 

Then wait for the Europeans to go home at 11:30, get them out of the way, push it higher, and then buy into the close—because there always seems to be money flowing in at the close. So let’s beat the market-on-close imbalances. 

Obviously, life is not that simple. Somebody joked to me, “Can they program that into the IBKR API?” I guess in theory, you could. But in reality, that can’t necessarily last. 

Breaking it down—the 3:50 rally is strictly because money is flowing into ETFs and mutual funds. That’s the traders at those funds’ way of guaranteeing a decent close and decent trading performance for themselves. If you’ve been buying all day and the market closes at its high, that’s probably a pretty good thing for your results. 

But realistically, there’s this faith that the market is just going to bounce back from everything. 

I’m trying to avoid the term the market’s assigned to how it views the tariff trade—I think that’s political, and it’s not our role to be political—but the market is certainly looking through any tariff noise at this point. And to be fair, it’s understandable why: because every big pronouncement has either been postponed to some degree, rolled back to some degree, or backed off. 

The only one that’s really gotten teeth so far is the steel tariffs that went into effect today. So I think the market has decided that tariffs are a lot of noise, the political scene in Washington is a lot of noise, and even though earnings expectations for the S&P 500 are lower than they were the last time we were flirting with the 6,000 level, momentum is in your favor. 

Momentum—I’ve written this before—momentum in its purest form means we’re only caring about price action. Therefore, I don’t really care about fundamentals. We know that only works for so long, but that is the mentality the market has right now. 

Andrew Wilkinson 

But surely, Steve, there must be some concerns in the background. 

Steve Sosnick 

I view the biggest concern to be the bond market. And when I hear people like Jamie Dimon and Ray Dalio expressing that same concern, I have to think that maybe it is a pretty valid concern. 

Breaking this down again—not getting too political—we had seen, at least in the aftermath of the tariffs, a flight basically from the U.S. I’ve written about this a couple of times: we saw the S&P 500 trade down overnight and then get it all back during the day. Essentially, that had been the pattern. 

Now it’s equalizing a little bit. I think part of the reason is that U.S. traders have gotten a bit more aggressive. Part of the “buying futures before brushing their teeth” thing—before their first coffee. That registers as the overnight session. But still, we’re looking at a situation now where the budget bill passed the House. On some level, it’s going to raise the deficit. 

And I know a lot of the proponents have been dismissing the Congressional Budget Office, saying they get it wrong. They actually, over time, don’t necessarily get it that wrong. 

It involves a bit of supply-side thinking that I think can be a bit dubious sometimes in terms of the benefits of the tax cuts. But regardless, if you’re trying to reduce a deficit, there are two ways to do it: one is by cutting spending, one is by raising revenue. 

This bill works on the former, but not the latter. Now, I’m not sitting here advocating for tax hikes, but if you’re going to continue on a larger spending path—even though you are making cuts—you’re maybe slowing down the rate of growth of the deficit and debt, but not necessarily shrinking it. 

At some point, you do have to wonder: are we one bad auction away from something really terrible? We’re not there yet. But to me, the thing that I watch most closely is the 2–10 spread. 

Because that can tell you very bad things if it starts to expand. If you start to see the two-year yield shrink dramatically, that’s the market telling you they’re afraid of a recession—because they figure the Fed has reason to cut rates. 

And what we’ve heard from Fed governors is that they’re much more afraid about re-stoking inflation than they are about a weak labor economy. We’ll hear more about that on Friday. 

We heard from ADP today, which was not encouraging. But still, if you’re talking about 4.2% versus 4.3% versus 4.4% unemployment, that’s still a pretty healthy labor economy. 

But with all the tariff uncertainty, they don’t know what to do about inflation. So the Fed is not necessarily cutting. That would bring the short end down, the long end up—fears about either future inflation or the government’s ability to pay back its debts. 

I don’t think the U.S. government really can or would default. The question becomes, though: are you going to get paid back in inflated currency or not? Inflated currency means deflated purchasing power. 

And remember—the bond guys don’t get as seduced by all the same stories and rhetoric that stock traders do. Those of us on the stock side love a good story—and there are tons of them out there. Bond guys are pretty straightforward. They only worry about whether they’re going to get paid back. 

And if you’re a government bond trader, you’re pretty much going to get paid back. It’s just a question of how and when. 

This is why I consider the spread between twos and tens to be very crucial. We had a flirtation with 4.5% on the 10-years. We had a flirtation with 5% on the 30-years. That test proved… the market bounced below those levels; yields bounced below those levels; prices rose. 

Those two levels, to me, are really the ones to watch—because bond traders can get very squirrely all at once. They momentum trade too, by the way. 

Andrew Wilkinson 

I guess the third thing to add there, Steve—and you alluded to it, but you didn’t say it outright—it’s an absolute rise in U.S. yields, and again, relative to international yields. So I was envisaging perhaps global bond yields going up, but I think it would probably manifest itself more in a widening in the spread between the U.S. and Germany, the U.S. and the U.K., the U.S. and Japan even. 

Steve Sosnick 

For example, I saw a very good chart—I think it was from the former J.P. Morgan strategist Marko Kolanović, who’s got his own biases. He basically ran this chart of the U.S. dollar index and, I believe, the U.S. 10-year yield. They moved more or less together, and then in the last few months, we’ve seen a big dispersion. His conclusion was: it says 10-year yields are going to be 4%. 

Now, if you believe strictly in correlation, yeah, I guess that’s true. And again, being respectful of the term “it’s different this time,” I have to always be cautious when I use that. But if we are seeing money flow out of the U.S., that is what you would expect. You would expect to see the dollar weaken. At the same time, you would see the bond market stagnate—the bond yields stagnate. 

Can you get down to 4% again? Yes. I kind of shudder to think about the economic conditions that would be required for that to happen. And I certainly do not want to root for that, but I do think it’s telling us that there’s—I don’t know—there’s a fundamental shift. And I don’t know if it’s going to last or persist, but I think there certainly has been a secular move out of U.S. assets—certainly out of the U.S. bond market. 

And that is worrisome, considering—we’ve said this before—our biggest export is our debt. We buy stuff in exchange for people buying our debt. And also, you’ve got to wonder—we could go down rabbit holes—if we shrink the trade deficit, does that shrink the need for debt, etc., etc.? But that’s really what it comes down to. And I do think that is the thing that kind of keeps me up at night. And the tell is that 2-to-10-year spread. 

Andrew Wilkinson 

Steve, people are always looking for bubbles—in good times and bad—but are we seeing anything at this point? 

Steve Sosnick 

In general, no. But there’s certainly what I’m going to call some “bubblelicious” behavior out there. I noticed one of the more active stocks on our platform was a stock—SBET—and I was like, “What is this?” It doesn’t even trade options. I think it was $3 last week, and $3 two weeks ago, and $80 last week at one point. 

Andrew Wilkinson 

Wow. 

Steve Sosnick 

No, I was thinking it got up to $125 or something like that. I don’t want to go into the story—people can do their own research into it—but somebody asked me to explain it to them, and I said it’s basically an unholy story involving Martin Shkreli, a short squeeze, and a company’s desire to become an Ethereum treasury company. 

Andrew Wilkinson 

Wow. 

Steve Sosnick 

You’ve got people—you’ve got financial alchemy. We do see this every week. I see that there’s a few stocks out there that just—everybody seizes upon as momentum. Boom, the momentum gets going, everybody jumps in, it gets an outrageous valuation. Again, the fundamentals do catch up over time. But you do get these crazy moves that creep up, and that doesn’t happen if the environment is not—if there’s not some froth out there. 

Andrew Wilkinson 

The bubblelicious nature of financial alchemy. Thank you. 

Steve Sosnick: And by the way, just to prove my point about the rubric—if bad news comes out at 10 o’clock, buy the futures. The S&P is more or less back to where it was when we started the call—or just before we started the call. Despite the lousy ISM numbers, stocks have shrugged those off as well. 

Andrew Wilkinson 

There you go. Thank you very much, Chief Strategist Steve Sosnick. 

Steve Sosnick 

Thanks, Andrew. Take care. 

Andrew Wilkinson 

And don’t forget—if you enjoyed today’s podcast, remember to subscribe wherever you download your podcasts from. Bye for now.