"Picking up pennies in front of a bulldozer" comes to mind when viewing the current situation, where many stocks have rallied after breaking through primary support. Markets find short-term support and the temptation is to snap up bargains. But probabilities have inverted. Buying on the dips is no longer the profitable strategy that it was in the bull market — with high probability of substantial gains outweighing the low probability of material losses. We are now in a bear market where we face low probability of material gains versus high probability of substantial losses.

Why have probabilities inverted? There are two types of sellers active during a crash: astute investors seeking to reduce their market exposure; and traders seeking to profit from the fall by selling stocks short. The first group are likely to sit on the sidelines after they have sold, waiting for the turmoil to pass. But short-sellers tend to take profits when the initial spurt of selling slows, their purchases encouraging a few brave souls to venture into the market, picking up pennies in front of the bulldozer. There are two forces ranged against these buyers. First, short-covering will fade as the market rises and short sales are likely to again rise. Second, there is a large group of investors sitting on stocks who missed the opportunity to reduce their exposure during the initial sell-off. Their confidence now shaken after the sharp fall, the group forms a large block of resistance. As stocks rise, they enter the market in increasing numbers, causing the rally to falter. When the rally falters, the number of sellers swells alarmingly, initiating a second decline. The cycle may repeat several times until eventually new buyers enter the market.

The market in times like this is driven by sentiment. Gauging reaction to good and bad news is the best measure of investor resilience.