The Federal Reserve's hawkish stance triggered a historic collapse of the US stock market on Wednesday, but less than 24 hours later, bulls rushed into the market at Thursday's open, suddenly buying up the sold-off stocks.

However, as Thursday's trading progressed, the US benchmark stock indexes retraced or completely erased their initial gains, and the question became whether this was just a temporary drop and whether investors should Buy.

After experiencing an almost unparalleled two-year bull market in modern history, the US stock market is in a precarious position. Signs of optimism are everywhere: tight positions and a low demand for downside protection. Fund managers have reduced Cash holdings to historic lows and are heavily investing in US Stocks. The S&P 500 Index is 10% above its 200-day moving average.

"I would be very cautious," said Eric Beiley, Executive Managing Director at Steward Partners Wealth Management. "Volatility is increasing, and there may be another Sell-off."

All of this is seen as ominous signs. The wording of Federal Reserve Chairman Powell, as well as the Fed's intention to cut interest rates at a slower-than-expected pace, may be the most unsettling aspect for stock investors. "It's like driving on a foggy night," Powell described the outlook for interest rates at Wednesday's press conference, urging caution in lifting policy restrictions.

"Be careful what you wish for," said Adam Phillips, Managing Director of Portfolio Strategy at EP Wealth Advisors. "Most people expect and support hawkish cuts, and that is precisely the result."

Traders are now facing a unique challenge: betting on the future direction of the stock market. History is no longer a guide. The previous macro landscape—strong economic growth and a loose Federal Reserve outlook—has been turned upside down. Coupled with Trump's tariffs and large-scale plans to deport illegal immigrants, along with the effects of tax cuts and regulatory reform, the economic outlook will become even more chaotic.

Phillips stated, "After focusing on the positive factors following the November election results, investors have faced the reality that policy uncertainty may make the path forward bumpy in the short term."

During periods when the stock market typically performs well, the Cboe Global Markets Volatility Index (VIX) has been pushed up to its highest level since August. US Stocks tend to benefit in the second half of December as fund managers scoop up bargains while retail investors are on holiday.

The VIX Index has surged.

However, this year's situation is different. So far, the S&P 500 Index has dropped 2.4% in December, on track for its worst quarter in over a year. With the S&P 500 Index having risen over 20% for two consecutive years, the issue for bulls is whether to cash in those profits before the new government's plans and their impact on monetary policy become clearer.

Beiley said, "I have been building cash positions like money market funds and short-term government bonds, in case the Federal Reserve does not cut rates as significantly as previously expected, which is a smart move."

However, global fund managers are doing the opposite; they are reducing cash holdings and injecting funds into US Stocks. In the process, they have triggered a threshold. Bank of America noted that this has historically been a sell signal for stocks.

Global fund managers' cash holdings have reached levels that could trigger a sell-off in the stock market.

For investors wanting to know what will happen next, this warning may be worth paying attention to again.

Carol Schleif, Chief Market Strategist at BMO Private Wealth, stated, "There are many investors taking profits by the end of this year. For them, taking some gains off the table may not be a bad thing."