After New Highs in U.S. Stocks: Slow Bull Ahead or Bull Trap Looming?

After the U.S. stock market reaches new highs, should we expect a slow bull market to continue or fall into a bull trap?

In an environment where "no news is good news," the U.S. stock index has once again hit new highs. Although this outcome was not entirely ruled out previously, the bulls’ progress amid various looming risks has slightly exceeded expectations. Historically, after reaching new highs, the market tends to revert to a slow bull phase. However, could Trump’s unpredictable behavior disrupt this conventional pattern? Actually, closely monitoring a common indicator allows for timely strategic adjustments.

The ATR (Average True Range) volatility indicator is commonly used to measure market intensity. In the stock market, it exhibits a clear trend: rising volatility usually signals falling prices, while low volatility supports market rises and development. Notably, when the daily chart reached new highs this time, volatility was still declining. Based on averages over recent years, an ATR daily level around 50 typically corresponds to a slow bull market. The weekly chart also shows this indicator in a downward trend. Therefore, overall, the current bullish breakout appears relatively reliable, and the likelihood of a short-term bull trap is low—unless Trump suddenly triggers some major unexpected news.

That said, there are two sides to this. An effective breakout and short-term potential for further gains do not necessarily equate to replicating the eternal bull market of the past. Considering Trump’s actual objectives: if he is merely seeking financial gain, then the situation is straightforward. But if he aims to accomplish something significant and leave a legacy, a stock market continuing to rise at high levels may not align with his goals or path. The fundamentally incompatible relationship between China and the U.S. remains a major source of uncertainty, with the trigger firmly in Trump’s hands. As the "hundred-day grace period" approaches, how the next moves unfold will be critical. If the current situation persists or talks continue without major impact, the market should remain stable. However, if there is a repeat of the initial phase involving reneging and breaking agreements, it could trigger a market turning point. From a long-term perspective, this latter scenario is only a matter of time.

Strategically, I personally believe the "fight while retreating" approach can still be maintained for now—for example, reducing positions by a certain percentage after every few percent rise. Although this risks missing out on gains, comparing this to the gold market shows that missing out is only temporary. As long as one resists buying at high levels, there will be opportunities to re-enter. Naturally, shorting against the trend is inadvisable at present. With both price and volatility signaling bullishness, predicting a market top is unrealistic. Only when new negative news emerges alongside rising volatility should selling or shorting be considered.

At the trading level, hedging between the Nasdaq and Nikkei indices is worth considering. Currently, the NQ1!/NKD1! ratio (Nasdaq vs. Nikkei) is near historical highs, just one step away from previous peaks. Taking equal short positions on Nasdaq and long positions on Nikkei offers controllable risk, with profit and loss potential extending down to the relative lows of March this year or even to peak levels at the end of 2012.

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  • YumZoay
    ·07-02
    It's crucial to stay cautious; market psychology can shift quickly.
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  • kookieman
    ·07-02
    Insightful analysis! Appreciate the depth! [Great]
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