Don’t Step in Wall Street’s “Bull Trap”

Stocks plummeted today as the market finally started to turn the corner after chopping sideways for two weeks. The Dow, S&P, and Nasdaq Composite all sunk with tech leading the way lower.

Much of today’s loss was caused by Home Depot (NYSE: HD) and Walmart, both of which missed earnings estimates and posted poor guidance for the year ahead. The guidance misses were particularly damaging as it suggested that consumers have grown weaker than expected. January’s ripping retail sales data indicated otherwise.

“The consumer is still very pressured, and if you look at economic indicators, balance sheets are running thinner and savings rates are declining relative to previous periods,” said Walmart chief financial officer John Rainey.

“And so that’s why we take a pretty cautious outlook on the rest of the year.”

The earnings reports only injected further uncertainty into an already uncertain market. But will stocks continue falling? KKM Financial CEO Jeff Kilburg sees today’s dip as a very “buyable” opportunity for traders.

“The market seems [composed] despite the fact that it’s going lower at the current moment — this is just the way some investors got ahead of themselves,” Kilburg explained.

“There is some emotion in the market, but this downdraft is going to be bought. It’s still buoyant.”

Prior to today’s big selloff, Hargreaves Lansdown strategist Susannah Streeter put out an equally bullish note.

“There’s a quiet pulse of positivity on the markets with investors still cautious about the direction of interest rates in the United States, but hopeful that recovery elsewhere will lend a hand to trade,” Streeter wrote.

“Worries are still hanging around that US inflation will still take significant time to be whipped into a shape which will mean higher rates will have to linger for longer, sentiment which has been supporting the dollar.”

That’s right, folks; it’s time to start buying again according to some institutional analysts.

But when looking at actual trading activity from hedge funds and the big banks, it’s a completely different story. Nomura analyst Charlie McElligot noted that the market is starting to see the first signs of “real money” selling in US equities this year. Selling flows are also hitting yearly highs according to McElligot.

Hedge funds are also attacking retail short-squeezers again, causing the market’s “most shorted” stocks to reverse sharply over the last few sessions. Silvergate Capital (NYSE: SI), for example, exploded 28% higher last Wednesday.

It has since erased all of its squeeze-driven gains.

Other market overachievers like airlines are coming back down to earth. American Airlines (NYSE: AAL) started off the year with a massive 37% rally.

Today, the stock is down over 4% through noon.

The market is clearly teetering on the precipice of a significant downturn. On Wednesday, the latest FOMC minutes will be released from its Jan 31st – Feb 1st meeting.

This could easily be the trigger that starts the next major market rout if investors don’t like what they hear. On the other hand, a bullish minutes release may only delay the inevitable.

So, for the week ahead, watch out for “bull traps” being laid by Wall Street strategists. Their banks will be net short while they talk a bullish game in interviews with the financial media, likely searching for retail “suckers” to take the other side of a losing trade.


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