Another Bull Trap: It Just Wasn’t Meant to Be

Bull Trap

It happened again. As I noted yesterday, Thursday is the worst performing day for the markets in 2022. This anomaly – simply known as Days of the Week – struck again. The institutions won again. 

After a brief period of positive momentum for two days, the markets have flushed back down into a negative channel again. Momentum is squarely negative. I’m back – heavily in cash – as the selloff looks like it will continue.

Since early April, I’ve warned about “Bull Traps” and negative channels. And the big moves we had on Monday and Tuesday presented another classic example. Investors looking to “Buy the Dip” find themselves caught in the Bull Trap. I’m sorry… A rebound wasn’t meant to be.

The Selloff Continues

As I noted yesterday, institutions have used short-term rallies to sell off stocks. If you’re looking for a proxy for what is happening in the tech sector, pay close attention to Cathie Wood’s ARK Innovation ETF (ARKK). 

Every time there’s a short-term rally in these shares, we see a quick selloff follow. Those declines represent the selling of the stocks owned by Wood’s ETF. Stocks like Teladoc (TDOC), Coinbase (COIN), Roku (ROKU), Zoom Video Communications (ZM), and more. Institutions continue to dump these stocks.

Now, people are still holding onto these “growth stocks” because they’ve bought into the narrative. They’re disruptive, they’re innovative, they’re the future… They’re going up 500%… 5000%… Cool, man. And if I had wheels, I’d be a wagon.

These people are “invested” both mentally and financially. But fundamentals matter on the way down, and institutions are dumping these stocks every time there’s a little bounce. 

And not even the executives at the companies are scooping up shares on the cheap. On a week-by-week basis, momentum has been negative for 19 of the last 26 weeks.

Yet Another Bull Trap

The key problem I have moving forward is this “Bull Trap” pattern. This has now transpired for roughly half of a year – 26 weeks. At some point, people realize what is going on. 

The people who are buying the dips and trying to time the markets will eventually stop doing this. As a result, institutions cannot engage in selling during low-volume rallies. And at that point – the selling just continues without enthusiastic buyers. 

This Bull Trap creates conditions for four things:  

  • Capitulation – where certain people just throw in the towel and write off the loss because that pattern doesn’t follow. 
  • Forced selling – where funds are stuck holding stocks that no longer meet their requirements (for example: a holding must have a market capitalization level above a certain level – like $10 billion), and they are FORCED to sell the stock at any price to get it off the books if the company falls under that capitalization level. 
  • Extreme volatility – the resulting price movement of MANY stocks simultaneously creates large amounts of volatility and pulls even the safest investments down in the process. This can be a challenging time for value investors, momentum investors, and anyone who is trying to establish a healthy long-term portfolio.
  • A paradigm shift in price discovery – when we see a lot of selling and a lack of buyers, the question becomes: What is this stock worth? It places a dramatic focus on the fundamentals and the health of a company.  Since November, we’ve been experiencing this challenge, and we’re still in the early innings.

Where to Put Your Money

A lot of people don’t recall that we once had a financial crash in technology back in 2000. It was healthy because stocks were extremely overvalued. Even after the tech sector’s 20% decline this year, guess what? 

Most stocks still are overvalued. With the Fed moving quickly on interest rates and preparing to drain liquidity from its $9 trillion balance sheet, you don’t want to catch a falling knife. 

This is why I’m paying close attention to where insiders sit on their stocks, particularly in the tech sector. Unfortunately, they aren’t doing much right now. This is a list of insider purchases from CEOs and CFOs over the last ten days in the tec sector. 

This is a paltry list of buying. What does it tell me? While tech stocks have been in a negative channel, no one is stepping up and screaming: “This tech stock is cheap.”

Except for Cathie Wood, who keeps buying the stocks that no executives are… And her ETF keeps going lower… Remember, cash remains your best friend in negative momentum conditions.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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