Stock market rally : Bull Trap

After the lows in December last year, the stock market has risen significantly again in recent weeks. Nevertheless, investors should not lull themselves into safety, as it could be a classic bull trap, believes financial expert Sven Henrich.

Bulls vs. Bears

Is the bull market over? This question has been on the minds of many market participants for quite some time. However, it is very difficult to find an answer. The S&P 500 gained 7.78 percent in value in January of this year, the market is again around 14 percent above the December lows. But is this a continuation of an upward trend or only a brief recovery?

The current situation on the stock market is similar to that in 2000 and 2007, when prices peaked, says Sven Henrich, founder of and known for his technical macroeconomic analyses. In September last year, the US stock market was heading towards a wall and the long upward trend of this decade had thus come to a halt. At the moment there is an aggressive counter-rally, but the lows of last December will soon be re-tested.

“The stock market has changed a lot in the last month, but I am not surprised that there has been a recovery,” says an analysis on the financial website Seeking Alpha. “However, I continue to believe that […] the lows of December 2018 will be re-tested in the coming months. I see this recovery as a “bull trap”.

Signs of a bull trap

Henrich sees a lot of clues that caused concern – this rally could turn out to be a “big fat bull trap”. Technical data showed clear parallels to the years 2000 and 2007. The low unemployment rate or the Fed, which has suddenly stopped its cycle of interest rate hikes, are clear signs of this. In addition, both economic growth and corporate earnings growth are slowing.

The excessively high valuations and the trade conflict between China and the United States are doing the rest. Henrich believes that these and other factors signal the imminent end of the economic cycle. The market could thus develop into a full-fledged bear market.

“It is not easy to see these things in retrospect, but much more difficult, if not impossible, when you are in the middle of the action. And here we are – right in the middle of the action – and it will take weeks, but I guess we’ll know more in the next month or two,” the analyst explains. In his opinion, investors should consider reducing their exposure to the stock market.

“I don’t expect a big crash, but there will be a lateral consolidation as far as the eye can see. It will be a pretty large area to which the S&P will be limited in the coming years. If there are new highs, they will be marginal, and there will still be many stocks that won’t reach their peak from a few months ago,” says the analysis on Seeking Alpha.

We will probably find out in the coming months whether the experts are interpreting the signs correctly and will be right in their fears.

DAX: Sale after bull trap

The sentiment is clearly affected and that is exactly what caution is required for. Nothing points to a stable DAX, but to disoriented market participants who are on the buyer’s side and will soon be on the seller’s side again.

If the mood on the stock market is (allegedly) good, as yesterday’s rising prices were supposed to suggest, then one has to ask why the DAX had to open with a huge price gap to the south? So the optimistic outlook cannot be that certain. Consequently, an imminent false signal, also known as a bull trap, is obvious.

The bull trap is confirmed as soon as the DAX falls below 9775 points. The buyer side will immediately flee the market and selling pressure will increase significantly. The sellers would sense their chance and use the re-entry into the triangle to sell. Moreover, in this battered sentiment, hardly anyone would be able to win shares to buy.

A clear overhang on the sell side will quickly depress prices. Since now in the range of 9600 points the buyer side is thinned out (have shot their powder in the last days), the resistance should keep itself low. The first price target for a sell-off is 9400 points.