Fruit of the Gloom

Importantly, although near-term market movements can’t be predicted, bull markets typically don’t end amidst a lot of investor caution.  Bull markets usually end as optimism peaks, just as bear markets end when pessimism peaks (as happened earlier this year).   The quick regeneration of investor caution with each bull market pullback is a healthy sign, as this caution regen­erates the pessimism “fuel” that powers markets higher as it is gradually converted into optimism (through investor buying).  Indeed, you might view periods of rebuilding caution as a kind of “fruit of the gloom” that extends bull markets.  In a similar vein, when market pullbacks don’t create investor fear, that’s the time to become more cautious.