Bull Trap Or A Bull Market?
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Is the recent rally a “bull trap,” or are we in a new “bull market?” Such was a question I recently received on Twitter. Of course, understanding the term “bull trap” is needed for those not deep into technical analysis.
“A bull trap is a false signal, referring to a declining trend in a stock, index, or other security that reverses after a convincing rally and breaks a prior support level. The move ‘traps’ traders or investors that acted on the buy signal and generate losses on resulting long positions. A bull trap may also refer to a whipsaw pattern.“
An excellent example of a “bull trap” was in June of 2022 when the market rallied 20% and had completed a 50% retracement of the last market decline. The media quickly pushed headlines declaring a “new bull market” had started, and technically there was historical data to support that claim.
“Since WWII, every time the S&P recovered 50% of the bear market price decline, while the 500 may have re-tested the prior low, it never set a lower low,” Sam Stovall, Chief Investment Strategist at CFRA Research
The problem, then, is the bear market was not over, and during the next couple of months, as shown, the market set new lows.
A bull market or bull trap?
Once again, the markets are rallying. As prices rise, investors are now jumping into the market, aggressively increasing equity allocations, hoping that recent gains are a clear signal the “bear market is dead.” As we noted recently, this bullish market rally certainly has a different tenor than what we witnessed in 2022. To wit:
“The difference currently is that the market is trading well above the 200-DMA with a ‘bullish golden cross’ of the 50-DMA above the 200-DMA. The technical backdrop is significantly different than that of 2022 and suggests that stocks will likely continue to trade higher in the coming months.”
Despite the critical technical differences, many individuals still expect the bear market’s return. The presumption is that investors piling into the market this year, particularly into the Technology heavy Nasdaq, are walking into a “bull trap.”
The stock market is looking more of a bull trap.
