Making Sense of Bull Markets, Bear Traps, Bear Traps and Bull Markets

Michael Teague |

With the Dow this week having reached four consecutive days of record-breaking highs, the question on everyone’s mind is “for how long will it last?”  This question has been rephrased and reiterated in a variety of ways, almost always using the age-old financial metaphors of the bull and the bear.  Are we in a bull market?  A bull trap?  Is a bear market on the horizon? And so on.

For as self-evident as these terms might at first glance appear, it is still relatively easy for confusion to arise, especially with the hyperactive frenzy that is a more or less built-in feature of the 24-hour news cycle.

For the sake of clarity, the definitions of “bull”, “bear”, “bull trap”, and “bear trap” will come in handy before going any further:

Bull – refers to an investor who thinks that a particular stock, industry, or the market as a whole will be entering an upward trajectory.  Such an investor will approach the market, presumably, on the premise that anything purchased can be sold later at a higher price.  A bull market is one whose upward trajectory is expected to continue for some significant period of time.

Bear – refers to an investor who thinks that a particular stock, industry, or the market as a whole will be entering a downward trajectory.  Bearish investors attempt to reap their profits off of the decline in the price of a security or a market.  A bear market is one whose downward trajectory is expected to continue for a significant period of time.

Bull Trap – Denotes a situation in which there is a false indication that a declining trend in a stock or index has reversed itself, when in fact the the security will continue to decline.  Bullish investors who hastily buy up such stocks will then be trapped in a bad investment.

Bear Trap – Denotes a situation in which there is a false indication that an upward trend in a stock or index has reversed itself, when in fact the security will return to making gains.  Bearish investors who attempt to short-sell a declining stock or index find themselves trapped when their investment stays flat, or worse yet recovers, as they will be stuck covering their short position at a price that can be far higher than the one they originally paid.

Now, consider the following three headlines culled from the past week of commentary and analysis about the Dow’s incredible run this week:

-Would new Dow record set a bear market trap?
-DJIA Passes All Time High Again: Bull Market or Bear Trap?
-Bull market or bull trap?

The first article talks about a “bear market trap” in the headline.  But never at any point is this exact term used in the body of the piece.  Rather, the author is simply going back and forth about whether a record-breaking Dow performance would mean that a bull or a bear market is on the horizon.  In any event, “bear market trap” is not a term that is commonly used by any journalists or commentators, including the author presently under consideration.  The confusion here results from an overload of financial terms, and is limited to the headline itself.

The second article, if its headline is to be believed, asks if the Dow’s consecutive all-time highs represent a “bull market” or a “bear trap”.  The confusion here is a bit worse, because the author asks this same question, using the same terminology, in the actual body of the article.  The “bull market” aspect is rather clear, in other words, the author is questioning whether or not we are in a bull market as a result of the Dow’s behavior.
The “bear trap” portion is where the confusion comes in.  The author does an excellent job of questioning the thesis that what we are now seeing is indeed a bull market, using evidence from the current political landscape, Federal Reserve policies, and the recent 2008 crash.  But nowhere does he describe anything that resembles what would presumably be the alternative, a bear trap.  A bear trap, after all, means stock prices will decline shortly, before returning to their upward trajectory.  It would seem that the author is talking about a bear market rather than a bear trap.

The third article is the work of the same author as the second one, and is more or less an extended version of it.  Yet the title asks whether we are in a “bull market” or a “bull trap”.  The question, phrased this way, makes much more sense, and would seem to resolve the issue with the second article.  Of course, if bullish investors act on the premise that we are now in a bull market when in actuality a bear market is on the way, then a bull trap would indeed be something to worry about.

It is not possible from the above discussion to determine with absolute certainty whether or not the confusion here results from the authors themselves, or their editors.  However, it certainly does seem as though the lack of clarity is lexical and not semantic.  Either way, it can be interpreted as a nice reminder to investors that they should be very circumspect not only about how they spend their money, but about what they read that may lead them to make decisions about how they spend their money.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
ALLY Ally Financial Inc. 20.40 0.08 0.39 5,582,257

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