A Perfectly Set Bear Trap? By Market Analyst D.R. Barton, Jr.

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D.R. PhotoEverything old is new again. The power of using the market narrative to inform our investing choices is as evident as ever.
Today, we’re going to touch on the subject of the market narrative briefly in order to add a twist. In addition, we’ll concentrate on a very bold money-making call on market direction.

 

Not One Market Narrative But Two

 

As a reminder, the market narrative is the overarching concept that is the primary market driver. Since the U.S. Presidential election sixteen months ago, the narrative has been the Trump growth agenda based on three pillars: lower taxes, less regulation, and more infrastructure spending. With the new tax reform bill signed into law, one of those legs was firmly set in place. The reduction in regulations is ongoing but enough changes have been made (largely through executive order) so we can say that two out of three are largely in place. The infrastructure plan looks like it is going to take some time to enact … so no leg three just yet.
We also see evidence of our “narrative in waiting” rearing its head from time-to-time. The Fed Great Unwind narrative will be the foundation of tightening monetary policy accompanied by rising interest rates – and that narrative will usher in a more challenging financial market environment.
Admittedly, our current blended narrative gives us two things to watch instead of just one. Which one is still in command? As we have seen with the “tariff troubles”, the Trump growth narrative continues to dominate. The market’s noticeable reaction to every Trump tweet and response out of China shows this dynamic fully. But if ultimately there’s to be more and deeper market trouble – it’s the emerging Fed unwind narrative that’s most likely to derail the global economic growth train.
In the midst of these transitioning narratives, I’d like to offer some market direction clarity. I believe the technical set-up on the charts is confirming the growth narrative in a big way and the markets may have just set the perfect Bear Trap.
What’s a Bear Trap, you might say? I’m glad you asked…
Lions and Tigers and Bears (Trapped), Oh My
There are a dedicated group of analysts who always see the market as a glass which is half-empty. These permanently bearish people (or permabears for short) have never met a pullback that they didn’t like (and that they didn’t predict).
While the market bottom of the Great Recession was made in March 2009, permabears have been calling for a market top since April of 2009. Since then, they have “called the top” dozens or more times. Their influence has caused some people to miss out on part or all of one of the great bull market runs in history. Since early February, permabears have been as happy as a pig in slop — and they’ve been winning over more converts as well. But right now the market is threatening to catch them in the midst of their pessimistic exuberance.
In the simplest terms, a “bear trap” happens when the market seems to have reversed its long-term uptrend. The trap encourages people to jump out of long positions and even go short or buy put options. I like both of those types of trades — in the right sectors at the right time – but right now, the market may have set a textbook bear trap.
For stocks to rebound from intermediate lows and catch the bears unaware, we need two elements:
  1. Extreme bearish market sentiment and
  2. A technical foundation of support that holds a key level.
Well, both of those are now in place.
Jason Goepfert and his excellent compilation of data over at www.sentimentrader.com gives us this chart showing how extreme the bearish sentiment has become during this most recent down move:
DR Chart 1
Optimism has gone from all-time highs to multi-year lows in a matter of weeks. To that, add the strong technical support levels provided by the confluence of a double bottom and the 200 day moving average and you have the makings of a very nice trampoline indeed:
DR Chart 2
SQN Chart 3
A Bold Market Call
This combination of a bearish sentiment extreme and a technically logical reversal point should prove to be an ideal place to launch the next up leg for the market — however — one kind of risk remains a major factor. We’ve talked about headline risk and it is still a strong force in play — especially trade war headlines which can shoot the market hard and fast in either direction. So even if the bears do get caught offside here, you can expect a roller coaster ride of choppy ups and downs for the foreseeable future.
I always love to here thoughts and comments — and especially you additional insights(!) – please send them to drbarton “at” vantharp.com
Great trading and God bless you,
D.R. Barton, Jr.

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