Bull markets that thrive purely on technicals are often doomed to perish by their own hands. A market fueled by liquidity will inevitably face grounding due to a lack of that very liquidity. During such phases, our investment behavior needs to be adequately mature, refined, and preemptive. However, many of us are reluctant to miss out on the excitement that a liquidity-driven bull market offers. We tend to value participation more than we respect prudence, and caution is not our primary concern. Instead, the fear of missing out dominates our mindset.
Yet, liquidity has its own dynamics. When we believe that the supply of capital will last indefinitely, we may suddenly confront a shift in market conditions that leads us rapidly to capital scarcity. Capitulation can occur swiftly when capital scarcity becomes evident. In such moments, the market loses confidence decisively, and its conviction simply vaporizes. Are we nearing such a moment in this bull market? While it is always challenging to pinpoint a defining moment in the present, it seems fairly evident that we could be approaching that point.
However, the market has been close to such a moment multiple times in the past two years, managing to pull back comfortably and strongly each time. The hope within the investment community is that their recent experiences will repeat themselves now. Yet, we can never know in advance when things will shift decisively in the stock market. Even after such shifts occur, it takes time for us to come to terms with the changing scenario. This phase feels more decisive than previous ones, and investors must exercise greater prudence when making fresh decisions.