The Risk of a Bull Trap Is Increasing

After two large moves on Monday and Tuesday, the pullback on Wednesday looked like a well-deserved rest. The Nasdaq composite snapped its win streak with a 0.8% decline after gains of 2.8%, 1%, 2.1%, and 2.6% in the four sessions before it. That isn’t anything dramatic and illustrates how strong markets tend to stay sticky to the upside.

Technically, this action is quite bullish, but I have some concern that a bull trap may be developing, and I am being more vigilant than usual.

Nothing Fundamental Changed

The big move was triggered by a combination of poor positioning and FOMO. Traders were caught leaning the wrong way after the confusing reaction to the mega-cap reports, and the scramble to get repositioned produced two of the strongest trend days we have seen in months.

What did not happen is any resolution of the underlying problems. The capital spending question is exactly where it was. The financing cost issue has not gone anywhere. What shifted was the mood, and some of the doom and gloom around AI lifted. That is a legitimate reason for stocks to go up and it can run further than the skeptics expect. It is not the same thing as an improvement in fundamental conditions, though.

The Chips Are Not Confirming

The semiconductor sector (SMH) is the group I am watching most closely, and it is not confirming this rally to the degree that provides confidence.

It never recovered its 50-day simple moving average during the bounce. Micron (MU) and Sandisk (SNDK) are rolling over again after participating in the move. If the AI trade were genuinely repaired, the memory names would be the first place you would see it, since they were the epicenter of the damage. Instead they are stalling out. Nvidia (NVDA) is holding up and that will be the name to watch.

The mega-cap hyperscalers are messy as well. Amazon (AMZN) and Alphabet (GOOGL) have both been swinging around violently, which is not what leadership looks like. A group taking charge of a new advance trends. These are thrashing.

The Good News Is Underneath

There is still quite a bit of speculative action below the surface, and that is where the market action is most interesting.

Small-cap earnings are producing large moves and the reports are piling up now. There is also rotation into the mining names, with gold acting well and copper strengthening. The United States Copper Index Fund (CPER) is breaking out.

The indexes are at an important juncture and the former AI leaders are struggling to build further momentum while a meaningful number of individual stocks are having good days on their own news. Anyone reading the index level alone is getting a distorted view of the market.

Game Plan

I raised some cash Wednesday, mainly as a consequence of positioning ahead of earnings reports rather than as a broad market call. I do have some concerns about negative seasonality as the earnings catalysts disappear and I want to have plenty of cash to build some new positions.

The reports are sharpening my shopping list. I feel good about several new names that reported well and are now de-risked to some degree. A stock that has already delivered its numbers and held up afterward is a much easier position to build than one still carrying event risk.

My main focus is navigating small-cap earnings and working to keep accounts near their highs. Right now I am more concerned about defense than offense.

The jobs report Friday morning is the kind of event that could give us a surge in volatility especially with bonds enjoying what looks like a dead cat bounce. I see no edge in being aggressive in front of economic news when the setups I want in individual stocks will still be there next week.

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At the time of publication, Rev Shark had no positions in any securities mentioned.