As expected, Israel retaliated against Iran, and news Thursday night of the strike caused both futures and Treasury yields to collapse. This is the fourth time in four weeks where the “flight to safety” trade lifts government debt. Of course, the move has yet to stick. Following the collapse in futures, traders began arguing that what’s happening with futures is merely a “bear trap.”
In trading, a bull trap and a bear trap represent deceptive market signals that can mislead investors into making unprofitable decisions, but they operate in opposite market conditions.
A bull trap occurs during a downtrend when an asset appears to be recovering, enticing traders to buy in anticipation of a rising market. Prices then resume falling, resulting in losses for those who bought in. Conversely, a bear trap happens in an uptrend, where a brief price decline leads sellers to anticipate a market downturn, prompting them to sell off their assets. However, the market quickly recovers, leaving sellers at a disadvantage as prices climb.
Essentially, while a bull trap lures investors with the false promise of a rising market, a bear trap tricks them with the fear of a falling one.
I think we see both here. While for now it seems as though Iran won’t escalate by retaliating against Israel, there are other worrying dynamics that favor the bears. The main one here of course is gold, which I continue to believe is warning about war and a currency crisis in its unrelenting move higher. If this were a bear trap, gold would confirm by selling off. Instead, it’s holding strong.
Crash Alert: A Bull Trap Is in Effect Here
In other words, gold is signaling that the move off the low in stock futures was the bear trap. Now a bull trap is springing into action.
Other defensive sectors are also indicating that such a dynamic is at play. For instance, utility stocks are outperforming the S&P 500. Utilities are a defensive sector. Why would they be performing so strongly if the market was past the risk-off period?
Amid last night’s news, I posted the sequence that I believe can play out in the coming weeks. While the market is worried about the Middle East, I’m more worried about oil prices and what the Bank of Japan does next.
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.
