Game of Trades: This is a Textbook Bear Trap

In just two weeks, the stock market has gone from being overly fearful to closing in once again on all-time highs. The volatility index topped 65, a level last seen around the Covid crash. That index is now back to its normal range near 15.

Meanwhile, investor data shows that as the market neared a 10% pullback level, investors got increasingly bearish. In hindsight, the market move now looks like little more than a classic bear trap.

A bear trap is simply a market downdraft. It makes investors bearish, leading to a selloff. But the trap is sprung and prices shoot higher.

Those who held steady did fine. Those who bought into the market and ignored the fear made out like bandits.

For investors, it’s essential to know what separates a normal pullback and bear trap from a major selloff.

For starters, investors can look towards economic conditions. While conditions have weakened, it’s also weakening to the point where central banks will start cutting interest rates. With rates at their highest level in 15 years, the start of rate cuts could be bullish.

Meanwhile, the U.S. Treasury curve remains inverted, after briefly flirting with un-inversion. It’s only after the curve un-inverts that investors should be thinking about a recession in the near future. When a recession looks likely, markets will start to move lower and price that in.

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