On Black Friday in 1929, the New York Stock Exchange collapsed and triggered a year-long global economic crisis – prices fell in stages over several years. In between, they recovered by up to 25%, only to plunge again shortly thereafter.
Investors who interpreted these short-term recovery phases as a reversal of the trend bought heavily – and fell into the trap. This is called a bull trap by the stock market.
Two Animals, Two Philosophies
Bull trap and bear trap behave in opposition to each other and go back to the two animals that have always been connected to the stock exchange: Bull and bear.
A so-called bull market – also called bull market – stands for an optimistic expectation of the market. A bull buys stocks in the hope that they will appreciate in value.
The bull market
The bear market – also known as the bear market – is pessimistic about the future. The bear makes profit through skepticism and disbelief – it believes in a decline in the value of stocks and trades, for example, in put options.
Generally speaking, the bull stands for an upturn in prices, the bear for a fall in prices.
Investors mostly hope for a bull market – that their investment pays off in the form of a profit.
Stock price movements up and down are created by the combination of both approaches.
Bull trap and bear trap: put on the wrong horse
If we now talk about bull traps, this means that investors are assuming a “bullish” market trend, i.e. rising prices, but the stock market is following the exact opposite trend.
The exact opposite is the case with the bear trap: Investors expect a “bearish” trend – i.e. falling prices – but the market has the opposite in mind for the security and gains. Both traps arise when an investor interprets buy or sell signals into the market that turn out to be wrong.
Market participants strive to derive turning points from the stock market trend by means of the so-called chart analysis, which initiate a trend reversal into a bear market or bull market. If this fails, they quickly fall into a bull trap (the alleged low point has not yet been reached) or a bear trap (the alleged high point has not yet been reached).
In the case of a bull trap, for example, this can lead to the buyer reversing his expectations for fear of a fall in value and selling his securities in order to avert even greater losses. If he has done this and then the prices go up but the trap is perfect.
In general, it can be said that a bear or bull market lasts at least two years after the Second World War before the market reverses its trend.
Dangers of bull and bear markets
Bulls hope for a strong bull market – a period of strongly rising prices. This is also called a boom.
Bears, on the other hand, want to profit from a strong bear market – a period of sharply falling prices. This is also called a crash.
Extremes are dangerous in both directions, because: An exaggerated bull market can lead to a speculative bubble – expectations are too optimistic and no longer follow the real upswing.
“If this bubble bursts, it can quickly go in the opposite direction: A stock market crash – i.e. an extreme bear market – is the result. Investors sell, which causes prices to fall and thus leads to further sales. Prices fall into the bottomless.
The financial crisis since 2008 is an example of this process. Because the trend turned very fast. The Dax, as footballers would say, only faked its departure. Instead of going up, it’s going down, and this will probably continue for some time to come. At any rate, this week’s counter-attacks on weak trading days were too timid. Three times it went without large resistance more than one per cent downward. The Dax low of 11,750 points in March is still around 800 points away. However, the stock market usually goes down faster than up.
The international trade conflict that escalated last weekend has hit the stock market hard. Daimler was the first German company to have to adjust its profit forecast because higher tariffs are driving prices and reducing sales opportunities.
Now the high dependency of the German stock market on the export-oriented automotive industry is becoming even more apparent: The four car stocks Daimler, VW, BMW and Continental represent more than 30 percent of the net earnings of all 30 DAX companies and 25 percent of the dividends.