Interactive Brokers strategist dishes on the evolution of dip-buying and the “flight to crap”

Yesterday, before the tech and Trump tariff shocks — not to mention a weak jobs report — put the stock market on track for its worst day since, well, the last Trump tariff shock, we had a nice chat with Steve Sosnick, chief strategist at options trading platform Interactive Brokers.

He opined about the state of market sentiment, the relentless buy-the-dip mentality among retail traders, and how the current AI capex boom differs from the dot-com bubble of the late 1990s.

Here are excerpts from our conversation, edited for clarity and concision.

Matt Phillips, Sherwood News: I’ve been writing — admittedly a lot — about the sort of euphoric, speculative nature of the markets right now. The euphoria is not at all-time highs or anything, and it’s possible that we could go back to late 1990s, dot-com bubble levels of craziness. But it’s an interesting time. Where do you think things stand?

Steve Sosnick, Interactive Brokers: We moved away from the worst, the flight to crap, which was there last week.

But speculation is far from dead. There’s so much reflexive dip-buying, and at times it works really well. The people who bought the dip Tuesday when Powell was speaking were certainly vindicated a couple hours later after market futures were ripping.

I’m noticing that the half-life of dips seems to be getting shorter. The reason for that, I will assert, is that everybody is so vigilant about buying dips that their framework for what constitutes a buyable dip keeps getting smaller.

Sherwood: Interesting.

Sosnick: It’s to the point where I think people are reluctant to sell unless the news is truly dire, because they don’t want to miss the dip and the rally that inevitably will follow.

Sherwood: In other words, if it’s “always right” to buy the dip, then eventually dips will get smaller or even sort of disappear.

Sosnick: Exactly. The logical end point of that is you don’t ever get dips, because why would you sell? All it means is that you’re going to miss a viable dip to buy.

Sherwood: But the markets can’t work like that!

Sosnick: Of course not!

Sherwood: I guess that means you would get a larger-scale crack in the markets, eventually.

Sosnick: Yes. And April told us how that crack will play out. The stocks that were the biggest winners going into the rout were the biggest losers during that rout. They are very crowded trades and there was really sort of nowhere for them to go.

If everybody’s long on a certain group of names, they’re going to be most affected, especially if everybody is fully invested and/or using margin to get leverage.

Nasdaq strongly underperformed in the down wave and then strongly outperformed on the way back up again. That’s because the consensus is that AI will continue to rule. I’m not going to argue against that.

Though I do have to wonder, at some point, is it a good thing just to continue spending billions of dollars on this? It seems to be working for Meta — the market is telling us the more Meta spends, the more they like it.

But the stronger the momentum in one direction, in this case up, the harder it is to disrupt. But when it is disrupted, the worse the outcome.

Sherwood: I don’t know if you were following the markets during the dot-com bubble of the late 1990s...

Sosnick: I’ve been doing this since the ’87 crash, for better or for worse.

Sherwood: Looking back, it seems like that tech boom had a lot of similar dynamics to what we’re seeing now: a legitimate technological advancement precipitates a major capex surge to basically rewire all of the American economy for this new technology. Of course, that didn’t stop a huge crash from happening.

But there are some real differences, too. Those companies in the 1990s, they weren’t the money machines that the Mag 7 are.

Sosnick: That’s the big difference. These companies are money machines. A lot of the internet companies weren’t. The question is how much valuation premium can these companies bear, and at what point does all this capex spending actually start to boost profit margins?

As of now, they keep making more money and they keep investing more. But the amounts of money they’re investing are staggering. At some point, you need huge returns on investment, and that could happen just because their user base is so entrenched.

But I’ve said the Mag 7 has kind of become the Fantastic Four. Year to date, Tesla is down. Apple is down. Google is basically just barely up for the year. Amazon is OK (Editor’s note: after our conversation, Amazon reported earnings and erased its year-to-date gains), and of course Meta and Microsoft have been rocket ships. I guess Broadcom would actually be the fourth of the Fantastic Four.

But at some point you can’t just keep pulling off leadership and expect an ever narrower cadre of stocks to keep being able pull the sled.