“I can’t think of a better introduction to these pages than the single sentence directly above. Denial is easy. Ignoring history is easy. But evading the financial iceberg that lies in wait for the unwary is going to be hard. In fact nothing about economics and financial markets is easy. Fragmented by opinions, emotions and fraud, ignored by denial and distorted by time, much of economic history lies there just beneath the surface ripples, “representing all the sins we never had the courage to admit to and the all the lies we were never forced to face”.
Will Rogers was once quoted as saying
“There are three kinds of men: the ones that learn by reading; the few who learn by observation; the rest of them have to touch an electric fence.”
Albert Einstein once defined Insanity as “doing the same thing over and over again and expecting different results”.
These two observations came from people who understood well the vagaries of human conduct and the inability of many individuals to learn the lessons of history. And while spoken in different contexts, they more or less describe the psychology surrounding a Bull Trap and where we could be marketwise at this point in time.
Leaps of faith attempt to defy the odds against winning.
“Even when US sports commentator Jim Murray railed against the carnage at the Indianapolis 500, there was a laugh, however dark, in his outrage: ‘Gentlemen, start your coffins.’”
Watching the short term charts on the markets unfold their story is much like watching a slow motion train wreck in action, where half the observers appear to be oblivious to what is occurring and the rest panic stricken, as they watch for what lies ahead.
At the end of a long run up equities, there is one thing that all Bull traps have in common: the free fall aftermath preceding exposure of the reasons behind the market collapse, hence the name “Bull Trap”. This is the time when the inept and corrupt are exposed for who they are and what they have done. It exposes how they have spent months and often years scheming and hiding mismanagements and frauds from all who would dare to look and from all who ignored or covered up what they saw. It is only then, that complacencies and frauds are revealed and losses calculated allowing the blame game to start all over again, just as it did in 1929, in 2000 and in 2008.
Uptrends and Bull Traps
In the Charting vernacular we have a saying, “The trend is your friend until it isn’t.” Applying a similar view to Bull Traps you could say, “Optimism is your friend until it isn’t.” or even “Markets ignore bad news until they don’t”. These bon mots may be obvious in hindsight, but often difficult to discern in the here and now.
There are different types of Bull Traps, but the type that concerns us now is the one that mostly makes its presence felt at the top of a significant price rise. Signs that you are in the middle of one vary, and may or may not include very high peak daily volumes leading up to the top, combined with loud expressions of excessive optimism or alternately by complacency in the face negative outlooks. Personally, I have always found picking Bull Traps highly nerve racking, as most of what you read at the time is usually along the lines of how “the market is overbought and susceptible to a retracement prior to rising to new highs over the coming months”. In fact the words “Bull Trap” are rarely mentioned by market analysts of any type in any discussion on market prices at any time.
Convergence of highs.
For over three and a half years now, since the second half of 2009, I have been waiting for a similar convergence of indices and bellwether stocks as to what I saw in the equity markets in 2008. The current convergences of key indices and bellwether stocks are now at all time and/or cyclical highs and at the end of a long, drawn out and worn out bull trend. This, combined with surveys indicating excessive bullishness and indicators such as the $VIX showing excessive complacency are major warning signs that a Bull Trap may be waiting just around the corner. It should be noted also that economists as a group, are rarely able to pick market tops with any accuracy and their arguments to the contrary view only compound the confusion at the time (see discussion at the tail end of this commentary).
The key issue here is that at “Bull Trap” time, conflicted emotions are high and there is always a complex variety of unknowns, which cloud the issues and hamper accurate decision making. This is also the time when the careful comparative analysis of charts can hopefully improve the decision making process.
Bull Trap Comparisons – 1987- 2000 – 2008 – April/May 2011 – 2013? …”
Full article and charts
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