When stock markets finally break through to new all-time highs after enduring a bear market, the moment represents far more than just numbers on a screen. It’s the culmination of a complex psychological battle between fear and greed, hope and skepticism, that plays out across millions of investors with vastly different motivations and timeframes.
Having witnessed several of these transitions throughout my career, I’ve observed a fascinating and remarkably consistent pattern in how different groups of market participants behave during this critical phase. Understanding this dynamic can help investors make more informed decisions about their own portfolios and avoid some of the common pitfalls that trap both novice and experienced investors alike.
The “Second Chance” Sellers: Regret in Action
The first and often most significant force working against new highs comes from what I call the “second chance” sellers. These are investors who held their positions through the previous market peak, watched helplessly as their portfolios declined 20%, 30%, or even 50% during the subsequent bear market, and have been waiting—sometimes for years—for their chance to “get even.”
When the market finally approaches those previous highs, these investors see it as their opportunity for redemption. The psychological relief of potentially breaking even after years of regret creates an almost irresistible urge to sell. They think to themselves, “I should have sold at the top last time. I won’t make that mistake again.”
This selling pressure creates what technical analysts often observe as “resistance” at previous high levels. The market may approach these levels multiple times, only to be beaten back by waves of profit-taking from investors who are simply grateful to escape their poor timing from years earlier.
The irony, of course, is that these sellers are often making the same mistake twice—selling at exactly the wrong time. But the emotional scars from the previous bear market run deep, and the fear of experiencing another significant decline often outweighs rational analysis.
The Cautious New Money: Waiting for Confirmation
While some investors are eager to sell at new highs, others represent the opposite extreme. These are the potential new buyers who have been sitting on the sidelines, often holding substantial cash positions, waiting for “confirmation” that the recovery is real and sustainable.
This group has learned to be skeptical of market rallies. They’ve seen false starts and bear market bounces that ultimately failed. They want to see the market not just reach new highs, but hold those levels and continue higher before they’re willing to commit their capital.
The challenge with this approach is that by the time confirmation arrives, much of the opportunity has already passed. Markets rarely provide the luxury of clear, unambiguous signals. The very act of waiting for certainty often means missing the best entry points.
The Skeptical Majority: Fundamentally Unconvinced
Perhaps the most interesting group during these transitions consists of investors who acknowledge the market’s technical achievement of reaching new highs but remain fundamentally unconvinced that the rally is justified. These investors haven’t bought into the reasons driving the market recovery.
They might argue that valuations are still too high, that economic conditions haven’t truly improved, or that the factors that caused the previous bear market haven’t been adequately addressed. Their skepticism creates a constant source of selling pressure and limits the enthusiasm that might otherwise drive prices significantly higher.
This fundamental skepticism often persists well into a new bull market. I’ve seen investors who remained bearish for years after markets reached new highs, convinced that a correction was imminent. Sometimes they’re eventually proven right, but often they miss years of additional gains while waiting for their bearish thesis to play out.
The Steady Accumulators: The 401(k) Effect
While these psychological dramas play out among active investors, there’s a powerful but often overlooked force working in the background: systematic, unemotional buying through retirement accounts, particularly 401(k) plans.
These investors—often without making any conscious decision about market timing—continue their regular contributions regardless of whether markets are at new highs or multi-year lows. This steady flow of capital provides consistent buying pressure that can help push markets through resistance levels that might otherwise prove insurmountable.
The beauty of this systematic approach is that it removes emotion from the equation entirely. 401(k) investors don’t agonize over whether to buy at new highs—they just buy because it’s payday. This dollar-cost averaging effect can be particularly powerful during the transition from bear market lows to new highs, providing steady accumulation during periods when other investors are paralyzed by uncertainty.
The Psychological Breakthrough: When Momentum Shifts
Eventually, if the fundamental conditions support it, something shifts. The market doesn’t just reach new highs—it holds those levels and continues higher. The constant battle between sellers eager to get out and buyers waiting for confirmation begins to resolve in favor of the bulls.
This is when a new psychological level kicks in. The achievement of sustained new highs begins to change the narrative. Media coverage shifts from skeptical to cautiously optimistic. Investment committees that had been defensive begin to increase their equity allocations. Individual investors who had been paralyzed by the memory of previous losses start to feel the fear of missing out on further gains.
The transition can be gradual or sudden, but when it occurs, it often unleashes pent-up demand that can drive markets significantly higher in a relatively short period. Investors who spent years waiting for the “right” entry point suddenly find themselves chasing performance.
Historical Perspective: The Reality of Market Cycles
Here’s a striking statistic that puts this entire discussion into perspective: since 1950, the S&P 500 has spent only about one-third of its time making new highs. The other two-thirds of the time, the market has been in drawdown mode—declining from previous peaks and then working its way back to even.
This data point fundamentally reframes how we should think about new highs. Rather than being rare, extraordinary events that signal market tops, new highs are actually a normal part of long-term market progression. The majority of time spent not at new highs doesn’t indicate market failure—it represents the natural ebb and flow of market cycles.
More importantly, this statistic reveals a crucial truth about wealth creation: the real money is made during that one-third of the time when markets are making new highs. While investors spend enormous mental energy trying to time entries and exits during the two-thirds drawdown and recovery periods, the substantial wealth accumulation happens when you stay invested through the sustained periods of new highs.
This is where many investors sabotage their long-term returns. Just when their patience through the drawdown and recovery phases is about to pay off, they exit at the first sign of new highs, missing the very period when their wealth could compound most dramatically. The investors who build significant wealth over decades are typically those who resist the urge to “take profits” at new highs and instead allow their investments to participate fully in these wealth-creating phases.
Looking at specific historical examples reinforces this pattern. After the bear market of 2007-2009, it took the S&P 500 until March 2013—nearly four years—to definitively break through to new highs and stay there. Even then, many investors remained skeptical for years afterward.
Similarly, after the dot-com crash of 2000-2002, the market didn’t reach new highs until 2007, and that achievement was short-lived due to the financial crisis. The lesson here is that the journey from bear market lows to sustained new highs is often longer and more complex than investors expect, but it’s also more common than many realize.
Practical Implications for Your Portfolio
Understanding these dynamics can help inform your investment approach:
The Bottom Line
The transition from bear market recovery to sustained new highs represents one of the most psychologically challenging periods for investors. The interplay between regretful sellers, cautious buyers, skeptical observers, and systematic accumulators creates a complex dynamic that can persist for months or even years.
Success during these periods often comes not from trying to time the perfect entry or exit point, but from maintaining discipline, staying focused on long-term goals, and understanding that markets rarely provide the clarity we desire when we desire it.
The investors who ultimately benefit most from the journey to new highs are often those who recognize that market psychology is inherently unpredictable, but market progress over the long term has historically been remarkably consistent. Sometimes the best strategy is simply to stay invested and let time and compound returns do the heavy lifting.
Preston Henry, CFP®, CIMA®