Interactive Brokers' Steve Sosnick on whats fueling the comeback in meme stocks

Key Concepts

• Meme stock resurgence
• Retail investor enthusiasm and risk appetite
• "Flight to crap" - increased risk-taking in search of returns
• Defensive sectors, cash, and short-term fixed income as safe havens
• Dangers of chasing meme stocks and buying calls on heavily shorted names
• Importance of solid earnings and dividends
• Market peaks and subsequent corrections
• Portfolio assessment and risk management
• Overweighting in risky assets
• Crypto treasury companies, SPACs, and margin trading as potential risks
• VIX (Volatility Index) and options strategies

Meme Stock Resurgence and Retail Enthusiasm

The video discusses the recent comeback of meme stocks, with companies like American Eagle, Kohl's, Open Door, Krispy Kreme, and GoPro experiencing double-digit gains in a week. Steve Sosnick attributes this surge to a persistent "undercurrent of retail enthusiasm" and an increased appetite for risk among individual investors. He notes that retail investors were active buyers in April and have learned that taking more risk often leads to higher returns.

"Flight to Crap" and Risk-Seeking Behavior

Sosnick uses the term "flight to crap" to describe the current market environment, indicating a trend of investors taking on increasingly risky assets in pursuit of higher returns. He emphasizes that this behavior, while potentially rewarding in the short term, carries significant risks. He clarifies that "flight to crap" isn't necessarily bad, but it highlights the extent to which individuals are chasing returns.

Investment Strategies and Risk Management

Sosnick advises investors to consider defensive sectors, cash, and short-term fixed income as safe havens, especially given the current market conditions. He cautions against chasing meme stocks and buying call options on heavily shorted names, as these trades often leave investors "holding the bag." Instead, he recommends focusing on stocks with solid earnings and dividends, emphasizing a "stick to knitting" approach.

Historical Context and Market Peaks

The discussion references the market conditions in November 2021, when the S&P 500 hit record highs before experiencing a significant correction. Sosnick notes that the Nasdaq 100 peaked in November 2021, followed by the S&P 500 in early 2022. He suggests that the current meme stock activity could be a signal of a broader market peak, cautioning investors to be aware of potential risks. He highlights that markets often punish the largest number of people at the worst possible time.

Portfolio Assessment and Risk Mitigation

Sosnick advises investors to assess their portfolios and determine if they are "over their skis," meaning overweighted in risky assets. He specifically mentions avoiding crypto treasury companies (where investors pay a premium for something they could buy at face value), SPACs (special purpose acquisition companies), and excessive margin trading. While Interactive Brokers is known for offering margin at good rates, he suggests lightening up on margin trades as a risk mitigation strategy.

VIX and Options Strategies

Sosnick suggests that investors might want to take advantage of the fact that the VIX (Volatility Index) is relatively low, which makes options relatively cheap. He suggests that investors could buy puts on some of their holdings as a hedge against potential market downturns.

Conclusion

The video highlights the resurgence of meme stocks and the increased risk appetite among retail investors. Steve Sosnick advises investors to exercise caution, avoid chasing meme stocks, and focus on solid investments with dividends and earnings. He recommends considering defensive sectors, cash, and short-term fixed income as safe havens and assessing portfolios for excessive risk. The discussion also emphasizes the importance of being aware of historical market patterns and potential corrections.