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Are we caught in a ‘bear market trap’?

Hedge funds are placing big bets against the latest market rally.

In the wild, a bear trap is a steel contraption with sharp teeth that can clamp a bear’s paws.

Arguably more painful is the stock market’s version — a rally that tricks investors into buying when it seems a down market is bouncing back, only for prices to sink lower.

Some investors believe we’re in the grips of a “bear market trap” right now, per Bloomberg.

Over the last couple months…

… the stock market has rallied around speculation that the Federal Reserve would slow interest rate hikes. The S&P 500’s YTD losses have dropped from 23% to 13%. But not everybody’s bought the rise:

  • Hedge funds have placed a record $107B bet against S&P 500 futures, and some investing pros are saying this has the markings of a bear market trap.

The bears argue the Federal Reserve will need to keep raising rates to cut inflation to their 2% target, which could take over two years. Sustained inflation would result in lower consumer spending, and higher unemployment.

But it’s not all bad news

Bear market traps are nothing new — similar rallies occurred during 2002’s dot-com crash and 2008’s financial crisis, both of which the market recovered from.

  • Further, analysts expect unemployment to stay below 6%, a marker of a longer recession. If correct, that means an opportunity to buy the actual dip could be right around the corner.

Whatever you believe, be safe out there, and steer clear of either type of bear trap.

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