How the tech rally and PCE print could impact markets

Interactive Brokers Chief Strategist Steve Sosnick joins Market Domination to discuss the state of the markets (^DJI,^GSPC, ^IXIC) as Wall Street awaits the Federal Reserve's next interest rate decision.

A recent Deutsche Bank chart shows call option volume in megacap growth and tech rising compared to the rest of the S&P 500. Sosnick expresses concern, as it highlights "everybody piling in because it can't go down... That's usually when these things have a weird ending, parabolic moves. And we've seen one in Nvidia end in very unpredictable and often nasty ways. I'm not saying that this means Nvidia is going to hell in a handbasket, but what it means is when that big, big upsurge ends, that's usually accompanied by a lot of volatility."

The market could also experience volatility this week following the release of May's Personal Consumption Expenditures (PCE) index. Sosnick says the print will be very important as the Federal Reserve is data-dependent. "The market's pricing in a year-over-year rise of 2.6%, which I believe is because of a 1.1% rise anticipated. So that is definitely helping the disinflation argument," he explains. However, if that number comes in higher, markets may "get a little freaked out" and lower the rate cut expectations to one or none.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Melanie Riehl

Video Transcript

I wanna highlight a chart that came to us from Deutsche Bank today for Jim Reid highlighting it as his chart of the day where he's looking at call option volume in mega cap growth in tech, which is all the way on the right side of your screen.

It's hard to see, but there was a big spike in that versus the rest of the S and P 500.

Now, Deutsche Bank is arguing that maybe that's reason for a pause now in that upward momentum, I don't know if the last few days already qualified as the pause.

But what do you think?

How do you read that, that huge spike in activity?

This is where I start to get concerned that it's what, you know, it's what we call a blow off sometimes when you just really get everybody piling in because it can't go down because we're just gonna get on, on one side of the trade.

Um That's usually when these things have a, have a weird ending, parabolic moves and we've seen one in NVIDIA end in very unpredictable and often nasty ways.

I'm not saying that this means NVIDIA is going to hell in a hand basket.

But what it means is when that big, big upsurge ends, that's usually accompanied by a lot of volatility because, because there's a lot of disruption when, when, when the sure thing pans out, if everybody buys it, who's left to keep buying it?

That's kind of the problem.

I wanna switch gears a bit.

Some economic data.

Tap P ce Steve.

How important is that?

Is that print gonna be for the market?

Very.

Um And, and so I'll give you more than a one word answer.

Um You know, I, I think if we're, if we're talking about a very data dependent fed and we are um you know, the market's pricing in a year over year rise of 2.6 which I believe is because of a 1.1% rise anticipated.

So in that is definitely helping the disinflation argument.

Um Now 2.6 is not two.

II, I don't know if they need to really get to two.

I think they seem to be towing the line about we need to get to two barring some economic hiccup.

Um So I think any number that diverges from that will change the narrative about FED policy.

A a higher reading.

I think people will get a little freaked out and say, all right, well, maybe this, you know, maybe the idea of two rate cuts this year, 1 to 2 is, is should be 0 to 1 or, or, or not at all.

On the other hand, if the number is very encouraging, I think you'll hear a lot of talk about, you know, fed, cutting sooner and quicker.

Uh, uh, by the same token, you know, we've talked to a lot of folks lately who say it doesn't really matter that much this year if it's one, if it's two, if it's, if it's none in terms of the Market Act, ultimately, where the markets in the year has, it mattered that we went from expecting 67 rate cuts to 1 to 2.

No, it hasn't made a difference.

Part of that is because the economy helped, I mean, you, it was inconceivable that we would have a ST, a solid economy and 6 to 7 rate cuts, they're, they're mutually exclusive.

And I think I've said to you before that, you know, I, I, if given the choice I'll always take the stronger economy.

Um, but, you know, so if the, if the terminal rate at the end of the year is, you know, instead of five and a quarter, if it's five, if it's even 4.34 and three quarters or, you know, 4.5, really?

What's the difference?

It's not a big deal.

You, you know, that you'll still have probably some sort of positive real rate of return, um, you know, on, on the risk free assets called T bills.

Um, and so it doesn't change the narrative all that much.

But I think markets wanna see the direction and they really, I will say to this point they haven't cared that the direction hasn't been in their favor.

It hasn't made a difference.