Retail Is Beating the S&P — What They’re Buying Right Now

Joining us now is Steve Sosnick, chief strategist at Interactive Brokers. Steve, great to have you. Thanks so much for being here. It is my pleasure, Caroline. Thank you so much for having me. So, Steve, you have this unique window into the market because you can actually see what retail investors are buying and selling. So let's kick things off by you telling us what is retail telling you about this market right now. Are investors bullish. Are they bearish. Are they somewhere in between. It's always a moving target I think. You know right now what we've seen is summer volumes. Truthfully our volume you know, our volume numbers, reflect it are most active. You know, the the activity in our most active names has fallen off. It's understandable. They're as a result. Also, they're not particularly skewed to the buy or the sell side. They're almost always net buyers of stocks. I think that that sort of fits with, with what, people are doing. And quite frankly, successful investors have more money to invest. And also, you know, people invest, people invest the portions of their salaries and stuff. So we almost always see net inflows, but they've been relatively modest. The activity tends to be concentrated among the names you'd expect. It's very heavily focused on tech lately primarily semiconductors. Next seven has fallen off a little bit. We also see thematic names. You know, we saw, things like MicroStrategy and Coinbase, make an appearance on the list. You know, they were sort of forgotten about when Bitcoin was flirting with 60,000. They're back when it's flirting with 80,000. But in general, you know, I think if I gave you a quiz, Carol Caroline to say, like, pick ten of our 20 most active stocks, I think you'd have no trouble doing it because it's things like Nvidia. It's things like micron. One other thing to note is we did see a lot of interest in, leveraged ETFs while we still see some interest in stocks, the triple levered Sox ETF. We're not seeing the, excitement that we saw in some of the double levered single stock ETFs, such as the double levered SanDisk, double levered micron, things of that nature. So I think, maybe it's summer. Maybe it's just an appreciation for the fact that volatility, doesn't necessarily help for long term returns on those investments. Although people get attracted to them when volatility is there. I think those are some of the themes we've been seeing. Okay. You mentioned Nvidia. I was just taking a look at your notes. You saw customers buy Nvidia ahead of earnings and then took profits after the pop. You saw similar behavior with Salesforce and Tesla. Does that mean that retail is getting better at knowing when to take money off the table? I think they've always been pretty good at it. I mean, you know, remember, our customers are most active. Stocks are dominated by our most active customers. Our most active customers tend to be active traders. And so they do have they do have the buy low sell high discipline in them. And that's good at serving them quite well. But I think in general, the customers do have a sense of timing. That's very good. One of the names I haven't seen in a while, but that's characteristic of, buy the dip mentality, is when we get significant dips. And granted, those have been few and far between. But when we had them, let's say in the tariff tantrum or the aftermath of the, the, the start of the Gulf War. We see customers buying volume. But then they, we don't see them selling it because they look at some of those things as investments. The other stuff they tend to look at is trades. And so yeah, we did see them, buying and buying Nvidia in advance, selling it out. We saw them buying, Microsoft through much of the summer. And then when that stock hit its 15% pop, Microsoft started Microsoft started showing up as a on the sell side. So yeah, they they our customers do, understand when to ring the register, shall we say. What's a trade. Obviously as chief strategist now what's a trade you think you're you know investors are is getting right right now. I think what they're getting right is they've been assiduous at buying dips. On the other hand, that starts to scare me a little bit because not every dip all the time forever is a buying opportunity. You know, those of us who've been around a long time have the scars to prove it. I think I think our customers have gotten, quite successful at buying dips because, to be fair, it's been a strategy that's worked really well for the better part of 10 to 15 years. So I'm not going to knock them for it. But I do I do get the sense that sometimes they're doing it reflexively rather than doing it, opportunistically or strategically. And so I think that's one of the things that that people need to be, keeping an eye out. But I think right now, at least as we're at least what I'm starting to see with interest rates heading up and things of that nature, I do think it's, wise to be a bit more, nimble, shall we say, not so wedded to to one's positions. And I think, for better or worse, I think a lot of aggressive, customers learned that lesson when they chased, very high flying semiconductors. Higher. And then, then sort of bore the brunt of the profit taking, as that occurred. But in general, our customers have been successful. Our statistics show that our customers tend to have been beating the S&P 500 for the least. They did last year when I left, you know, as of last night, statistics. And I think over the past two years. So they they tend to know what they're doing. But I think it's important to separate, trading from investment. I had a customer ask me the other day just, you know, somewhat of a friend of mine, really, basically saying he, you know, he bought a stock and and it and it went up nicely. When should he sell? I said, what was your price target. So I don't know. And I'm like, that's not I don't know what you're doing there. Traders always have price targets. Investors should have price targets. But I think that's important to, to understand. If you're going to be using trading type strategies, you should have the disciplines that that work for traders. That's, you know, by defined by levels, define sell levels to find stop levels. And even as an investor, I think that's important to, to have in your toolbox because we all need to be monitoring our investments. But our time frames might be longer if we're if we're thinking as an investor, not as a trader. Okay. So I want to break that down a bit more, and we'll talk about what being nimble in this current market looks like in just a second. But first, how do you know when a dip is a buying opportunity and when it's not? And can you give an example of a dip that you might see right now, or that you might think will eventually see that would be smart to get in and one that you would actually avoid? Yeah, I think I think the question becomes, you know, has the fundamentals, of the given situation changed markedly? And hour or so, is there something that's just sort of, a secular flow or is it more of a timing situation? So I think in some of the, in some of the stocks, you know, we could look at them and say, all right, the fundamentals, you know, the fundamentals don't look appreciably worse. And I'll go back to Salesforce here, where, you know, the everybody loves the company. For a while, everybody loved software as a service. And then everybody hated software as a service. And I think what what happened there is neither was necessarily true. And so you got to a situation where it had it had felt like the sellers were done. Sometimes it doesn't behoove you to be the first. And I think if it's a very short term situation, yes, it behooves you to to act quickly. Sometimes if it's a longer term situation, you want to let the dust settle out. And, you know, certainly in the case we discussed of Salesforce or Microsoft where the basic business was quite good. But just, you know, it had fallen out of favor with regards to, let's say, what I called the make or take or trade. They were, they were they were buying, products, you know, from the semiconductor companies. So everybody started to focus on the recipients of Microsoft's try and spending and not maybe not so much why they were spending the money. So I think those are the situations where it makes sense, you know, to look to, to look to buy dips, and, you know, or just we get them all the time just in terms of short term, short term bouts of nervousness and things of that nature. That's if you're a trader and you have discipline and recognize when when that situation either rectifies itself or, more importantly, does not rectify itself. Those are the situations that you can try to be opportunistic from a short term point of view. From a longer term point of view, I think you want to look at situations where, where the market might really dislike something, but the fundamentals still remain solid. On the other hand, if those fundamentals appear to have changed, that's not a buying opportunity. There's a reason why people are stalling. So I think that, you know, that's that's the important distinction. It's very difficult. So that's that's all art not science unfortunately. Okay. So talk to us about what being nimble in the current market looks like and where you're seeing the biggest opportunities right now. Well, I think right now, as I'm looking at being nimble, I think that means not getting married to some of the positions. And we saw this, you know, obviously the this the situation that situational awareness should have been a big wake up call to people because that was literally someone who, got married to leveraged positions, and found themselves unable to, to get out of them when they needed to. So I think being nimble means maybe cutting back some of your leverage right now, if you, you know, if you utilized margin or cutting back some of your risk, maybe not. Maybe not being completely, fully invested in a small group of names and trying to diversify a bit, or, you know, one of the, one of the things that concerns me right now is the global, the global rush out of fixed income. And, you know, we've been taught there's been plenty in the news about rising rates in the U.S., but it's a long rate, long term bond rates have been rising around the world. Basically, there is not a country that has escaped escape. This it's it's, let's say, been worse than Japan, been less worse in Canada. But no, no, no one's, we, you know, we can put a table together of how that all worked. But for the most part, almost everybody's long rates are going up when log rates go up. That pressures valuations. If you're actually thinking fundamentally right, a stock in theory is the present value of its future cash flows or earnings, depending on how you want to do the model. But the higher the the interest rate, the lower the present value, the more you have to discount those future earnings. And so I think that behooves us right now until we see on bond price bond yields I'm sorry. Stabilize. I think that that is why you I think you may want to take on a bit less risk and, you know, certainly. Mind your stops, mind your position, concentration. I think a lot of people ended up with, very concentrated positions, fortuitously. Right. I mean, if you were, if you were long the correct stocks in the past year or two, those have severely outperformed the not good stocks. Maybe you want to reallocate your portfolio a little bit, you know, and check to see are you overextended or overexposed to certain sectors based on where you want to be? That's what I mean by being nimble. You know, not being married to a sort of doctrine that says, you know what I is? I stocks aren't related. Stocks are going to go up forever and ever. I'm just picking one semiconductor. So just this memory cycle is going to just last forever. Despite the fact that semis are notoriously cyclical over time. That kind of thinking to me means nimble. So does that mean that big Tech isn't necessarily the place to be? Is taking risk off the table mean rotating out of some of those tech names? You know, we were saw tech run and then we saw this broadening out. And then it went right back into big tech. You know, where specifically should it be now. Well, I think that's you know, I think you have to consider the fact that even if you're putting money into an S&P 500 mutual fund, which is, you know, we're index fund, which is which is pretty generic, whether you're doing ETFs, mutual funds, etc.. You're about 40 or 45% exposed to the I trade. So then on top of it, if you have investment positions that are heavily exposed to the AI trade, you're you're by definition putting all your eggs or a large portion of your eggs in one basket. I think that's important to recognize, that we've seen that this, that this trade has gotten a bit more volatile. Certainly the 70s had had that phenomenal and then pulled back. We really haven't seen them march back to those to those levels. Many of them have recovered off their lows. Again, we talked about things getting oversold for the reasons. And that's when you step in. But that but you know, the problem there is if you stepped in early as some of those trades unraveled, you got into some trouble. So so again, timing becomes a play. So what. So that's what I say is there's been I don't think people appreciate how well value stocks have done relative to growth stocks over the past year or two. And so I don't think it's wrong to be looking at lower bait on, meaning less market sensitive, stocks that that many cases pay dividends. Hopefully they'll use hopefully that which dividends that they can afford to pay because of their free cash flow. Not having to borrow money to pay the dividends. When you started getting into those situations, don't overlook those stocks in favor of all the growth stocks. And that's the balance I'd like people to have. Just because, you know, as we see trades, as we see, technology is a very tricky thing to stay invested in all the time. And there are there are there are definitely trends under the surface that should be giving people some pause. The fact that, token prices are plunging. The fact that a lot of these data centers are going to take 2 to 3 years, there are 2 to 3 year commitments before you can really get them in the ground. But we don't know what the technological, landscape is going to look like in two years. So there are risks out there in every new technology. It's happened whether start with railroads, worked through utilities, etc.. So just I think it's fair. To say have a little, you know, don't just put all your eggs in this one basket. And yes, think about diversification. When it when it presents itself. As we think about finding value stocks that, you know, where valuations still look attractive, that pay a dividend, is that very stock specific or are there certain sectors that you are favoring right now? Yeah. I can't do buy sell hold on. Individual stocks. As you as you've guessed, I can talk about individual stocks, but I can't recommend them. That's not my best work. I think in general, if it tends to be stocks specific, but the those stocks tend to be clustered in sectors. So, you know, I obviously the hyperscalers did fit that mold for a while, but I think most of them have now become, cash flow neutral, if not cash flow negative. So that sort of takes them off the table in that regard. You know, they tend to be things like consumer staples. But even there you have stocks that have that support very, very high PE is like like Walmart, or Costco. So, you know, are those value stocks? Are they growth stocks. It's tough to say. So I think you need to I think it behooves you to think about what sectors tend to be, more stable, more value oriented. But then within those sectors see which stocks, screen. Well, in terms of not having very, very high not necessarily PE, but Peg ratios, the PE to growth ratios, I think you don't want to be for a value stock. You don't want to be paying too much above one or from a PE basis. You really don't want to be paying a huge premium to the overall market PE. And then beyond that, that's that's where you that's where you do your screening. But I think the sectors tend to be the boring sectors, industrials, you know, basic materials, especially with commodity prices tending to, to be on the upswing. Consumer staples, maybe less. So consumer discretionary. Those would be the ways that I would start to to approach it. Okay. So almost more of a defensive approach to the portfolio. Then you've talked about what concerns you. You talk about taking risk off the table. I'm trying to get a better sense of your market view. Ultimately, do you think that this is a market that can move higher from here? I think we're I think we're in the midst of a bunch of challenges right now. And now, to be fair, the markets overcome all of them. But I think what really concerns me is the back up in long term rates. The fact that we're flirting with, that we're, that we're well over 5% on the, on the 30 year, flirting with 5% on the ten year, to put it in perspective, we, we touch 5%, like, for about a minute and a half in 2023. Before that, I think we had like a day or two above 5% in 2007. Before that, it was fairly routine, in the prior century. But you're talking 26 years of not seeing rates above 5%. And I think it's going to be difficult for investors to deal with that. If we find ourselves in a situation where rates remain high. And one of the things pressure and rates, it's not just government spending that's obviously a big part of it, but it's also the need that for fun, you know, for for the hyperscalers and the like to borrow money. There's trillions of dollars of, of liquidity needs, of borrowing needs just be as these data centers break ground. So in many cases, there's these deferred hiding liabilities and a lot of balance sheets. And so, I think we're in for a bit more of a challenging period here. You know, the energy situation is far from resolved. We're seeing commodity prices agriculturally, and, and then hard commodities getting pressured, you know, copper and things like that because of the data center buildout. You know, agricultural commodities pressure because of the price of diesel fuel, because the price of fertilizer is going up. Komnenos not helping. There's always a wall of worry. But right now, I think that, considering how far we've come, let's say in just the past few months, I do think that, you know, we have a lot of work to do before I think we really, get a sustained move higher because I think a lot of the, positive tailwinds that have been propelling the market in the last few years have, if not petered out, if not turned into outright headwinds, but they've certainly petered out in some ways. And I think that that that's why I have a very that's where I have a cautious view right now. Not maybe don't. So what type of growth but relatively cautious. So what does a challenging situation I think you called it look like. Is it a 10% correction on the S&P. Is it a 20% bear market. How challenging could this be? Well, I mean, I'm going to say we're way overdue for a 10% correction. Russell. Beyond the median length of a bull market. I'm not going to sit here and say, that's it. Tomorrow. Tomorrow we're crashing. We're going down 20%. That's not that's not a realistically, we've barely been able to sustain 5% pullbacks and 10% pullbacks are met with immense buying buying dip buying. So we're still there. But I think that that in many cases the the the the necessity of buying some of those dips or the or the speed of some of them, are going to be, are going to be pressured a bit more. So I do think we're looking at, I think the trend tends to be sideways to lower. I'm not going to put a short term number on it right now. But I do think that, this as we, you know, as we get into a seasonally difficult period, let me let me first say that everybody gets the September scary. The last two Septembers were up substantially prior. Four were down, 12 of the last 25 were up. So it's a it's a coin flip of even about September. But I do think that a lot of these pressures are starting to mount. And so I think we're talking let's, let's start with a modest pullback and see where the fundamentals are once we get there. But I think we're going to I think we're looking sideways to a bit pressured at the moment. And you think it will be higher rates that causes that pullback. Is it a ten year at 5%. Is that kind of your line in the sand. Yeah I think yes I think if we you know again I mentioned that we got to 5% twice in the past 2035 years. Oh sure. And it had you right in the past 25 years. And we didn't get through there. I think if we get through 5%, people are going to have to rethink. People are going to have to rethink their assumptions, because I think a lot of fundamental models have to be redone. And quite frankly, there's, it's clear that there's, you know, strong competition for funds, that's out there. And, you know, we we hear we always hear the thing about, you know, putting money on the sidelines, etc.. But there's a reason that money tends to stay on the sidelines, and that's people who, you know, who like to like to have a few months cushion, for their, for their needs, whether it's a company or an individual. Right. You know, I think we all it behooves us all to have, a couple of months of liquidity relatively handy. So, you know, I think the problem is, if you if we're get above 5%, it means that governments and corporations are fighting hard for available long term out for long available long term funding. And that does put a pressure on the market. We're not there yet. And typically what often happens is, you know, bond traders are momentum traders too. So I think, you know, you could get to a point where we get to 5% and and halt there. We could also find that end of the quarter tend to be big in the bond world because there's funding considerations around the end of quarters. So maybe you get to 4.99 on on September 29th and stop there. But if we get well above 5%, on the ten year, I think that becomes very, very problematic. Okay. All right. I think this is a great time to pivot to our rapid fire round of this or that. This is quick questions, quick answers, no hedging if you can help it. Are you ready, Steve? Sure. I'm buckled in. Let's go. Caroline. All right, here we go. Stocks by year end. Higher or lower? Lower. Better for stocks. Strong or weak. Jobs report. Strong fed hike in September or December. December. September. Buy any weakness or raise cash. Some of each, depending. Momentum or value. Value. More upside from here. S&P 500 market cap or equal weight. Equal weight. Strategy. Buy before earnings or wait until after. After better signal earnings or what investors do after earnings. See what investors do after earnings. And this finish this sentence. The stock retail investors can stop buying is. Nvidia. The stock retail is finally taking profits on is Salesforce. The area of the market. Retail is buying that I wouldn't touch is. Space related stocks. Yeah one word to describe how you're feeling about the market for the rest of this year. Cautious. Steve Sosnick, chief strategist at Interactive Brokers thank you so much for sharing some light on your customer activity reports and for giving us your views as well. We really appreciate it. My pleasure. Caroline. Thank you so much for having me today. If you enjoyed this street talk, check out our full interview with Kristina Hooper. She sees more than a modest pullback ahead, says it could be 10% or more, and explains how to prepare for it.