Are we seeing a bull trap for beaten down ASX shares?
But it’s not all good news in the market right now. Here’s why I’d be wary of buying shares in volatile industries based on recent gains.
What is a bull trap?
A bull trap is a false signal that occurs in share markets. It’s also often referred to as a ‘dead cat bounce’ where a beaten-down share climbs before falling back down.
Effectively, investors see a beaten-down ASX share like Webjet climbing higher. Thinking this is the time to buy cheaply, investors pile in and see some gains. However, there is often a trigger like an announcement or more data that shows it was just a false positive, and the ASX share falls lower again.
Why a bull trap could be coming for some ASX shares
The ASX 200 benchmark index has largely moved sideways since recovering from the March bear market. However, investors continue to be flighty and worried about the impacts of the coronavirus pandemic.
On the one hand, everyone knows we have immense job losses on the way. There are also concerns for high-profile industries like hospitality, travel, outdoor media and the arts.
Interestingly, the Webjet share price has rocketed 14.5% higher since Monday. ooh!Media shares have climbed 9.9% while the Corporate Travel share price is up 11.9% this week.
That’s despite Victoria reaching stage 4 lockdowns and a precarious situation remaining in many states across Australia.
That could mean we’re at the beginning of a classic bull trap. As investors cling to some optimism, particularly amid the August earnings season, some of these beaten-down ASX shares may climb.
However, this probably isn’t based on anything fundamental. I’d rather wait to see the August results and make a buy, hold or sell decision with more information in my hands.
If you’re brave and willing to take some risks, now could be a chance to buy some ASX shares cheaply. However, I think I’ll be steering clear of some at-risk industries for the time being.
Where to invest $1,000 right now
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Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.
*Returns as of February 15th 2021
Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Corporate Travel Management Limited and Webjet Ltd. The Motley Fool Australia has recommended oOh!Media Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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