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Investors should beware of 'a bull trap'

Brian Sozzi
Editor-at-Large

Beware of the trap, bulls — this market remains treacherous.

“From a technical standpoint, you want to beware of a bull trap. We have seen this huge increase in the markets the past couple of days. From a technical standpoint, we are just making sure the S&P 500 stays above the 2,750 level,” said David Nicholas of Nicholas Wealth Management on Yahoo Finance’s The First Trade.

Loosely defined by yours truly, a “bull trap” is when an investor gets sucked into thinking the coast is clear in a market or individual stock that is noticeably off its highs. The trap is usually set after a few good days for a stock or broader market that has been damaged.

That trap could very well be in place right now for investors.

After being shellacked in May, the Dow Jones Industrial Average, Nasdaq Composite and S&P 500 are each up about 2.2% to kick off the first week of trading in June. Whereas May ended with fears on U.S. dual trade wars with China and Mexico nailing risk appetite, June has started with hope — thanks to the Federal Reserve.

Fed Chairman Jerome Powell gave a wink to investors this week during a speech in Chicago on the governing body’s willingness to slash interest rates. Fed Governor Lael Brainard told Yahoo Finance the Fed would be prepared to adjust monetary policy if economic data continues to worsen.

And that may just happen: A very lackluster May ADP employment report on Wednesday suggests a mixed non-farm payrolls report on Friday. Coupled with fresh weakening in global manufacturing data since the spring, the Fed may be ready to do its part to stem trade war related economic sluggishness.

Trump’s trade wars could slaughter investors

Nevertheless, investors need to be mindful that the Fed cannot completely save a market off its April record highs. Progress must be made by the Trump administration on trade and fast, or the trapped bulls could be slaughtered.

“The Mexico issue with 5% tariffs in the short-term I don’t think will derail markets too much. Obviously if we get much passed that rate as the president has threatened to the 25% rate, that quite certainly will cause markets to pullback. And if China escalates further, traders have to be careful of that,” Nicholas said.

Value investor Tobias Carlisle of Acquirers Funds Founder agrees the market continues to have greater than normal risk despite the soothing feeling of its latest bounce.

“It was a monster rally to start the week off, some of that was reflected in value stocks — I think that is a sign people are prepared to be risk on. But value stocks did pullback on Wednesday, perhaps indicating that the market isn’t being as bought as people think on the surface,” Carlisle points out.

Brian Sozzi is an editor-at-large and co-host of ‘The First Trade’ at Yahoo Finance. Follow Brian Sozzi him on Twitter @BrianSozzi.

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