Everything old is new again. The power of using the narrative to inform our investing choices is as evident as ever. Today, we're going to touch on narrative briefly in order to add a twist, but we're going to concentrate on a very bold money-market call on market direction.
As a reminder, the market narrative is the overarching concept that is central as a market driver. Since the U.S. presidential election, that 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 is firmly in place. The reduction in regulations is ongoing, but enough changes have been made (largely through executive order) to say that two out of three are largely in place. The infrastructure plan is now looking like it is going to take some time to enact...
We've also seen 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 and will be accompanied by rising interest rates - and a more challenging market environment.
Admittedly, our current blended narrative gives us two things to watch instead of just one. But as we have seen with the "tariff trouble" issues - the Trump growth narrative is still the dominant one. It's the most likely to derail the global economic growth train - and the market's reaction to every tweet and comment shows this fully.
I'd also like to introduce a new sub-narrative that we need to keep a close eye on, because it will help us navigate the most popular stocks on the planet.
But first, I'd like to offer some market direction clarity, because I believe the technicals on the charts are confirming the 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...
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Lions and Tigers and Bears (Trapped), Oh My
There are a dedicated group of analysts that always see the market's glass as half-empty. These permanently bearish people (or permabears, for short) have never met a pullback that they didn't like - or didn't predict.
Permabears have been calling for a market top since April 2009 (the bottom of the Great Recession was made in March).
And they have "called the top" dozens or more times since then. But since early February, the permabears have been as happy as a pig in slop. And they've been winning converts as well.
But right now the market is threatening to catch them in the midst of their pessimistic exuberance.
In simplest terms, a "bear trap" is what happens when the market seems to have reversed its long-term uptrend, encouraging people to jump out of positions and even make trades that win on down moves like shorting stock or buying put options.
I like both of those types of trades - in the right sectors, at the right time.
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But right now, the market may have set a textbook bear trap. There are two elements needed for stocks to rebound from intermediate lows, catching the bears unaware:
- Extreme bearish market sentiment
- A technical foundation of support that holds a key level
We have both in place.
Jason Goepfert and his excellent compilation of data over at sentimentrader.com gives us this chart showing how extreme bearish sentiment has become during this most recent down move:
Pessimism has gone from all-time highs to multiyear lows in a matter of weeks.
Add that to the double-bottom/200-day moving average strong support level that I've been talking about, which has held after multiple tests in the last two weeks:
This combination of a bearish sentiment extreme and a technically logical launch point should prove to be an ideal place to launch the next up leg for the market.
However, with the headline risk we've talked about - especially the ability for trade war headlines to shoot the market hard and fast in one direction - expect a roller-coaster ride of choppy ups and downs even if the bears do get caught offside here.
Speaking of headline risk - there's another key type of headline movers right now, and it's found in the market darling FANG stocks. Facebook Inc. (Nasdaq: FB), Amazon.com Inc. (Nasdaq: AMZN), Netflix Inc. (Nasdaq: NFLX), and Alphabet Inc. (Nasdaq: GOOGL) have been market leaders for several years now, and with good reason. They are winning the commerce battles in their respective fields.
But Facebook's bent for playing fast and loose with people's data started a broader inspection of the business practices of these new market behemoths.
Then President Trump threw gasoline onto to the already smoldering FANG fire with his anti-Amazon tweet storm. Combined with the trade war fears, the recent swan dive by the tech sector has sent the markets back to test the February lows.
This is important enough that there is a whole sub-narrative surrounding the FANG stocks. Their freedom to operate in the manner that made them among the most valuable companies in the world is at stake.
Watch for an upcoming 10-Minute Millionaire report on how much risk these stocks have and which are the most likely to thrive despite it all.
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The post The Markets Have Just Set A Textbook "Bear Trap" - Here's How to Play It appeared first on 10 Minute Millionaire.
About the Author
D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.