Are bulls losing the war?

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Wednesday turned into another back-and-forth session for the S&P 500 as the market digested the minutes from the latest Fed meeting. The index spent most of the session bouncing between small gains and losses before ultimately closing down a fairly trivial 0.15%.

While the Fed’s meeting minutes were responsible for triggering a late wave of selling, the modest size of the givebacks isn’t all that noteworthy. Stock crashes are breathtakingly quick, so giving back a handful of points in the final hours of the session isn’t that big of a deal. This bear market has seen more than its fair share of shocking headlines that trigged gigantic waves of panic selling that sent stocks tumbling 3%. Wednesday’s 0.15% loss was about as far away from that as you can get.

While it is more fun to watch stocks climb higher, everyone knows down days are a normal and healthy part of every market. And more than that, this latest two hundred points retreat from recent highs has changed the risk/reward.

Hindsight being 202/20, it’s obvious now that 4,200 was too high and it was time for a cooling off. More useful would be knowing this back when stocks were challenging 4,200 resistance. Lucky for readers of this blog, that is exactly what I did on February 2nd when the market peaked at multi-month highs.

Bears are quickly becoming an endangered species, but as nimble and agnostic traders, we have to get concerned when one side accumulates too much power because it often ends in a reversal in the other direction. Now, to be clear, I’m not picking tops, but 700 points above the October lows and we have to be aware that a huge portion of the near-term upside has already been realized.

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And wouldn’t you know it, here we are a few weeks later and bulls are the ones that have become an endangered species. And so continues the swinging pendulum of sentiment.  But just as it was unwise to be chasing the market when everyone was bullish back near multi-month highs, it is just as risky to be overly bearish near recent lows.

Stocks move up and down, that’s what they do. Opportunistic traders take advantage of these price swings. Foolish traders don’t learn from their mistakes and keep drawing never-ending trend lines on their charts.

Can stocks keep falling? Absolutely, but is that the most likely outcome? If there was as much fear and uncertainty as the bears claim, prices would be falling a lot more than 0.15%.

Until proven otherwise, I will continue trading against these periodic swings, not betting on their continuation to extreme levels.

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