To The Moon

Is this a bull trap or recovery for S&P500?

This definition is taken from Wikipedia:

In stock market trading, a bull trap is an inaccurate signal that a declining trend in a stock or index has reversed and is now heading upward, when, in fact, the security will continue to decline.

It is seen as a trap because the bullish investor purchases the stock, thinking it will increase in value, but is trapped with a poor-performing stock whose value is still falling.

S&P500 chart as of 21 Mar 2025 (Asia)

Assessing a Bull Trap in the S&P 500

A bull trap occurs when the S&P 500 appears to rebound, luring investors, only to reverse downward. Picture a decline from 6,200 to 5,900, then a rally to 6,100 on short-lived optimism—perhaps monetary easing rumours — post the 105-point drop on March 4, 2025, which erased $875 billion rapidly.

Persistent inflation, a GDP slowdown to 1.5-2%, and a forward P/E of 22 could signal a bull trap, especially with low volume flagging “bull trap” risks. Investors may face losses if the index falls to 5,700 or below.

Evaluating a Recovery

A recovery denotes a sustained rise with solid fundamentals. If the S&P 500, after dipping to 5,900 in February 2025, advances toward 6,000, data like 2.8% GDP growth in Q3 2024, 4% unemployment in January 2025, and 10-15% earnings growth projections from AI bolster a recovery. Holding above 5,950 (50-day average) or 5,775 with broad volume supports this. Up 70-80% since October 2022, this 2.5-year bull market fits historical patterns, though tariff discussions and inflation threaten this recovery.

Analytical Framework

• Technical Indicators: A bull trap features a low-volume rally that stalls at 6,150 and drops below short-term averages. A recovery sustains the 200-day average (5,500-5,600) with momentum that stalls at 6,150 and drops.

• Economic Context: High valuations and tariff uncertainties suggest a bull trap; consumer strength and earnings favour a recovery.

• Sentiment: X shows division—some label weak rallies a bull trap, others see dips as recovery precursors. February’s bearish peak often signals a recovery.

FinViz heat map of the market

Current Outlook

Note the volume versus the average volume

One of the key indicators that we can consider is the volume. From last night’s closing (USA 20 Mar 2025), the volume is 2.8B compared to the average of 4.6B. This is weaker than the average and thus, the momentum (of the current trend) looks to be easing off.

As of March 21, 2025, the outlook is unclear. A fragile rally post-correction hints at a bull trap, risking a drop to 5,700-5,800. Steady gains above support with strength indicate a recovery, possibly hitting 6,500 by year-end, per forecasts. Since 1974, only 6 of 27 corrections turned bearish, supporting a recovery unless tariffs or inflation intervene. Caution remains essential.

@TigerStars

$S&P 500(.SPX)$

$Cboe Volatility Index(VIX)$