To The Moon

The SPDR S&P 500 ETF Trust (NYSE:SPY) is up more than 6% year-to-date in 2023, but Tom Essaye, founder of Sevens Report Research, said Friday there are at least three warning signs that the rally could be yet another bull trap for investors.

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What Is A Bull Trap?

A bull trap is a stock market rally that may appear to be a technical breakout above a key resistance level that eventually gives way to a sharp reversal to new lows.

Broke out of uptrend channel but above 200ema

Essaye said the stock market has rallied on an improved 2023 U.S. economic outlook. Yet there are at least three indicators the positive early year momentum could end up being a head fake:

3 Factors To Watch: First, Essaye said the recent Philly Fed Manufacturing Index reading suggests U.S. economic growth is slowing. Second, the new CPI and PPI readings indicate deflation is slowing or even potentially reversing. Finally, Essaye said the Federal Reserve may not be able to stop raising interest rates as soon as investors had hoped.

Setting up to close the gap at 4100

"Market expectations for Fed rate hikes are now showing a 56% probability of a June rate hike, up from basically 0% just four weeks ago!" he said.

Essaye said he hopes the S&P 500's October 2022 lows of around 3,500 will remain the lows of this Fed policy tightening cycle, but investors should remember the pain caused by multiple bull traps in 2022.

"Bottom line, if the economy is slowing materially, the decline in inflation slows and the Fed keeps hiking, this will end up being another bull trap, and a pullback of 10% or more should be expected!" he said.

40% gain taking puts shorting the downtrend

The combination of stubborn inflation and an extremely tight labor market with unemployment at 50-year lows will make it very difficult for the Fed to stop raising interest rates. The higher interest rates rise, the more pressure is applied to corporate earnings growth and the more difficult it becomes to make a case for meaningful stock market upside.

17% taking calls from reversal

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