Beware the 'bull trap' in a bear market: Experts caution investors

The latest upmove in the markets has cheered the investment community. The benchmark Sensex has rallied 15 per cent in just 12 sessions. Many are calling the lows made on March 23 the new bottom. 

Given the economic shock caused by the Covid-19 pandemic, it is stunning how markets have managed to hit a trough in just 69 days. 

This is the fastest the markets have taken to get out of bottom, compared to previous crises (see graphic 1). 

Experts, however, caution that the ongoing rally could be a ‘bull trap’ in a bear market. 

During previous crises, there have been many such traps — sharp upmoves — creating a belief that the worst is over. 

According to an analysis done by Prabhudas Lilladher, there were three bull traps during the 2007-09 Global Financial Crisis — when the markets saw bouts of sharp rallies only to revert back to new lows. 

Back then, it took 426 days for the market to form a bottom on March 2009. “While no two market cycles are alike, it is too early to say whether we will see a somewhat similar pattern repeat this time,” says the brokerage says in a note.