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Bull and Bear Traps
The market can bamboozle even the most experienced traders. One day an uptick is the start of a bull run, the next it’s a small peak before a deep valley. These jukes of the market are known as bull and bear traps. “Traps” because they trap some traders into a losing situation.
Bull traps1 typically occur when a stock’s price breaches a level it had previously had a difficult time surpassing. Investors buy into the stock thinking (read: hoping) the best gains are yet to come. But they don’t. The lack of buying enthusiasm fails to spark bull conditions and the stock continues its downward momentum. Buyers are trapped into long positions until the stock rises above their purchase price. Bull traps occur 45% of the time when a downtrend appears to reverse course, during which eager investors are 60% more likely to experience substantial losses.2
Bear traps3 usually happen when a stock appears to be declining, prompting fearful investors to sell their stocks as they anticipate a continued downtrend. But the selloff momentum isn’t strong enough to instigate a true bear scenario, so the fall is short and prices rebound. This leaves short sellers with a loss. Bear traps occur 40% of the time when an uptrend appears to reverse course, during which hasty investors are 55% more likely to experience substantial losses.2
Bull and bear traps are more likely to happen and hoodwink the best of us during times of high volatility. They’re also more likely in less liquid markets when stocks are harder to sell due to low demand or the reverse: stocks are hard to buy because people don’t want to sell. Investors are more susceptible to traps when market sentiment is overly pessimistic or optimistic, making it more likely to be taken off guard during a reversal. Sudden changes in sentiment can create a trap.
2025 is expected to be a highly volatile year when a new administration could enact any number of policies and make every kind of headline. Instead of worrying about falling into a trap or missing out on an opportunity when the market changes course, TrueShares offers portfolio accessories intended to smooth out volatility on both the upside and the downside. The TrueShares Quarterly Bull Hedge ETF (QBUL) and Quarterly Bear Hedge ETF (QBER) use options over rolling three-month periods in an effort to smooth volatility through the sharp ups and downs of the market so you can avoid such traps and stay the course.
For more information on QBUL, visit: https://www.true-shares.com/qbul/
For more information on QBER, visit: https://www.true-shares.com/qber/
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