Market Keeps Rising, but Who’s Doing All the Buying?

The stock market's direction continues to be aggressively and consistently higher, but it's hard to decipher sometimes who is doing all the buying.

Virtually every metric offered to gauge investor behavior is showing money draining out of the marketand insiders skeptical about the future.

From mutual fund flows to insider selling to analyst downgrades and upgrades, pessimism is pouring in faster than a Pabst Blue Ribbon beer tap at a hipster spring break party.

"Why are investors so cautious? Demographics and poor longer-term stock market returns probably play a role," notes Charles Biderman, CEO at the TrimTabs market research firm, in his weekly analysis. "But we also think that all the volatility and central bank interventions in financial markets are leading more investors to question how stable the financial system really is."

Biderman hauls out a variety of data points to show the level of investor caution.

Stock-based mutual funds have lost $1.2 billion since the start of February even though those same funds have returned 9.8 percent in 2012.

Moreover, bond mutual funds have pulled in at least $6 billion for six weeks running, totaling $29.6 billion in the past four weeks, which was 11.8 times as much the $2.5 billion into all equity funds.

Finally, and perhaps most damning, corporate insiders are dumping their holdings in droves, selling $6.8 billion in February, the most in 11 months and 13 times the level of insider buying, which is way above the norm of 8.6 times.

And yet...the market keeps on rising.

For answers to the sentiment dichotomy, Nick Colas, chief market strategist at ConvergEx in New York, took a look at opinions regarding upcoming quarterly earningsfor the Dow industrials, and saw a similar level of pessimism in the analyst community.

Analysts expect just 5 percent year-over-year sales growth for the Dow 30, which is the smallest gain in the short time his company has been tracking such expectations. Similarly, Thomson Reuters has found companies issuing negative earnings preannouncements outweighing those issuing positive ones by a 3-to-1 margin, the highest since the crisis days of 2009.

Colas tries to figure out why the market can look so good but expectations be so dour by dissecting analyst psychology.

"The logical question given the current rally is, 'What's going on here?'" Colas writes in a note. "Most sell side analysts presumably have some access to a stock quote service or the occasional business periodical, so they know equities are in full-on rally mode.

"You'd expect them to start raising expectations, feeding off the signal that markets are growing more optimistic about the U.S. economy and global prospects generally. We suspect they are staying on the sidelines for two reasons."

Colas cites "horror stories" about European companies and their austerity worries, as well as the desire to play it safe during the current rally. He reasons that analysts are watching their favorite stocks rise without the benefit of "buy" ratings, so they don't feel they need to "put (themselves) out on that limb."

More about those analysts: Despite a rally that has pushed the Standard & Poor's 500up 11 percent in 2012, analysts have cut their "buy" ratings on each of the index's 10 sectors during the course of the year.