Bull Trap Or Rally?

Hey Market Pilot,

It seems like we are in the time of one-day pullbacks. Despite “bad breadth” and the indexes being held up by a handful of names, all we needed was one stiff day to the downside and that provided enough of an opportunity for buyers to step in and buy the dip ─ hard.

I have been contemplating an idea, and I don’t know if it’s true or possible, but here it is. We are all thinking the market is going to roll over and get pulled down because of the poor breadth. Meaning that the majority of stocks are not doing well and generally trending down. This would generally be a sign of weakening market participation, and should be a clue the market is crumbling from within. It’s generally assumed that a handful of stocks can’t keep the market propped up when so many other stocks are deteriorating. 

But this isn’t happening. Maybe this is the biggest bull trap ever, but what if it’s something else? What if the bad breadth is indicating a majority of stocks are deteriorating, but those stocks eventually reach a point of oversold while the indexes are doing just fine? What if by becoming oversold, they become attractive as far as value and at a discount? I am still seeing a lot of double bottoms forming on weekly charts and that could persist for several more weeks ─ all  while not falling apart.

And what if this is all happening over the summer because of the lack of market participants? Think about all the traders out there. It’s summer ─  the summer after vaccines have been rolled out. Have you been taking trips and trading less? So have the fund managers. What if the poor breadth is more a sign of fewer traders putting money to work than actually something structurally faulty out there?

So what if these double bottoms hold, poor breadth is actually an oversold indication, and traders come back to the market when summer is over and start seeing that there are good buying opportunities out there?

This leaves many questions to answer in the next few weeks. Until then, I am still generally bullish and I don’t think the market is toast… yet.

Your Profit Pilot, TG

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