It’s not always clear who is on the winning side of a trade except with hindsight, and it’s not always clear who was trapped until it’s too late. I think last week may have been a bull trap to suck in more traders under the pretense of a seasonal rally.
A bull trap takes place when a temporary bullish shift or reversal happens within a broader downtrend. This fleeting upward trend can mislead traders into entering positions that lead to losses when the market returns to its downward path.
There is no clear evidence that suggests what happened last week means markets are guaranteed to keep rising. It’s effectively a coin flip at this point. The S&P 500 experienced a significant gain of 3.94% in the initial three days of November. It’s worth noting that going back to 1928, there have only been five instances where November has registered an equally robust performance in its first three days. These years include 1933, 2001, and 2020, during which the rest of November continued to see an upward move, and 1956 and 1982, where the rest of the month stocks fell.
There aren’t enough instances in history to know for sure what probability favors after such a rip higher last week. But the one thing I’m confident in is that last week didn’t prove we are in a bull market. We just don’t know yet.
Stocks last week just largely undid losses they suffered over the prior two weeks. Such moves, while violent, are not uncommon in bear markets, which I maintain we are still in. The most important thing to watch this week is how Treasurys behave relative to stocks.
If Treasurys continue to rally as stocks pull back, it suggests the stock market interpretation of bond market movement this week was wrong, and the flight to safety begins. It suggests the rally last week in stocks was indeed a bull trap.
The Bottom Line
It’s only Monday, so we don’t know just yet how things will play out, but I maintain that nothing really has changed here.
Small-caps stocks still look vulnerable. Utility stocks continue to suggest risk-off dynamics remain in play. There hasn’t been any sizeable turnaround in lumber relative to gold. And everyone is getting excited over 5 trading days.
The bottom line remains the same. Focus on conditions favoring an accident rather than the exact mile marker you might crash your car. Focus on the weather to know when to speed up or slow down. From an intermarket analysis perspective, it’s still raining outside.
Don’t assume the rally will continue.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
