Bull Traps and Bear Traps Ahead... Here's What to Do

Editor's note: Only one Stansberry Research analyst nailed the exact day the market would bottom in March – and that's technical analyst Greg Diamond. We've featured him before in DailyWealth. Today, we're sharing one of his recent essays about what he sees on the horizon... plus, how he says you should trade it.

What a ride the market has been on... massive declines and massive rallies.

Liquidity evaporates and then comes roaring back. Options prices are all over the map. The changes happen so fast, sometimes it's hard to keep track of everything.

However, the current environment is signaling what we can expect from the market going forward.

Last year, I outlined the case for a "round trip" market which, over the course of a few years, would see large declines and large rallies.

I shelved this outlook at the beginning of 2020 largely due to the rally that unfolded in tech stocks to start the year. I was looking for a big blow-off top.

But then COVID-19 hit.

I noted during the crash that we might be entering "the shortest bear market." And that's exactly what occurred...

From the top in February, the Dow Jones Industrial Average fell 37% in 27 trading days. The record before that was in 1987, when it fell 36% in 38 trading days.

Now that the market (and the Federal Reserve) have established a low earlier this year, I'm going to highlight what I believe comes next – and how to trade it...

The coronavirus is subsiding, the economy is opening back up, central banks are all-in on pumping massive liquidity into financial markets, and governments are writing stimulus checks for the millions who are now without jobs.

So, the big question becomes – is this the start of another bull market in stocks?

Over the past decade, investors have expected the Federal Reserve to step in any time volatility rises. While 2020 has been no different, the fact that 40 million people in the U.S. have filed for unemployment is a serious dent to the economy.

The stock market and the economy are in two very different positions.

This tells me that while a major low is likely in place, a new bull market is not yet in the cards. I expect the round-trip market will roll on.

However, this doesn't mean we won't see more double-digit gains in stocks this year. In fact, lately I've been quite bullish... And I am expecting new highs in most of the major U.S. indexes this year.

But what I'm highlighting today is a long-term look at the market. I'll illustrate this below...

Since 2018, stocks have been in a near perfect round-trip market. This includes false breakouts in which everyone thinks the bull market will continue... followed by big declines where everyone thinks the bear market will take over.

In short – equity markets are in a long-term range.

This is not the first market environment where a long-term range was the dominant force. Equity markets saw this from 1999 to 2003...

Big bull traps led to big bear traps for three years straight before finally bottoming in early 2003.

The same thing happened in the '60s and '70s, when the range lasted for 10 years...

We saw huge declines followed by huge rallies, with no sustained breakout or breakdown.

These range-bound markets were a result of economic stagnation after a long bull market. In technical terms, the range-bound markets worked off the overbought conditions of the previous long bull market.

Right now, with 40 million people out of a job, economic stagnation is back. Again, the disparity between the stock market and the economy is wide – we could soon see double-digit gains in stocks, but a major long-term bull market is not yet on the table.

And despite unprecedented monetary policy, central banks do NOT create wealth, do NOT create growth, and do NOT create jobs... The free market does.

What happens when you combine economic stagnation with excess liquidity from monetary policy? It's outlined above – explosive moves higher and lower over a long period of time. This environment could last until 2023 (following the 1999 to 2003 script) or even longer like the 1960s and 1970s.

Based on history, I have no reason to expect anything different.

So how should you trade this environment?

The March low is without question a significant swing low to work with. Any declines that stay above that low are likely buying opportunities for the next few months.

I'm a buyer on any decline that holds the March low... especially ahead of the presidential election. And I'm expecting new highs in the Dow Jones Industrial Average by the end of the year.

The Federal Reserve "crossed the Rubicon" by announcing it would buy up corporate debt and investment-grade bonds in March. The Fed will defend that action, and this means the March low will be defended as well.

Beyond that, my long-term plan is simple. We're going to buy the dip...

What happens after the next round of new highs? The round-trip market will make new lows BELOW the March low by 2023. It's a big call indeed, but I'm convinced it will happen.

Why? Because the Federal Reserve (and governments around the world) will complete the quest of eradicating free markets and capitalism. They will start buying stocks.

Then we'll see a new bull market. The question then becomes – how long can a bull market last without a free market?

I don't want to know the answer...

Good investing,

Greg Diamond, CMT

Editor's note: When Greg called the bottom in March, he didn't rely on headlines or earnings reports. Instead, he looked at ONE market signal. It's how he made $4.6 million dollars on one trade back in his hedge-fund trading days... And now, it's pointing to a new opportunity – in a company that has already given his readers a chance at 126% and 197% gains. Find out how you can access this recommendation by June 22 right here.

Further Reading

One secret driver can have a major impact on the way the market moves. It kicks in when stocks hit specific levels... triggering major swings in prices. Get the full story about what this volatility means for the near future right here.

"The current situation in America has no precedent," Austin Root writes. From the social and economic impact of the coronavirus to the major rally in recent weeks, we're in completely new territory. And that means it's time for a unique approach to investing... Read more here: How to Invest in a Market Without Precedent.

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Market Notes


Today's chart shows a tech leader in a powerful uptrend...

With the coronavirus keeping folks away from each other, many of us rely on our devices more than ever. We already used our smartphones often to keep in touch with friends and family, go shopping, and order food... But this year, with social distancing and stay-at-home orders, our phones were sometimes our only options. It's one more tailwind for this popular cellphone maker...

Apple (AAPL) makes the iPhone and numerous other electronics and accessories. Apple's lineup of interconnected devices, linked with the company's exclusive software, keeps customers loyal. The company saw sales fall sharply in February as coronavirus hit China, a big Apple market... But sales were already back up in March and continued improving in April.

AAPL shares are up more than 70% over the past year despite the coronavirus crash. They just hit a new all-time high. Apple's devices and software have become necessities for much of the world, and customers will keep coming back for more...